Monday, April 9, 2012

Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12)

This blog will offer a forum for readers of this blog to offer their comments regarding the administration of the the tax laws for offshore accounts, and specifically the IRS's offshore voluntary disclosure programs.  The hope is that some Congress members (or their staffs) and the IRS policy makers will read the comments and, to the extent that they state legitimate concerns, address those concerns.

Readers of this blog have made a number of comments that are worthy of consideration.  Unfortunately, they are scattered in various earlier blogs.  I do not have the time and patience to try to collect and repost those earlier comments.  So, I urge readers to restate their comments here.  Hopefully, with reflection, the comments can be stated more compellingly now.

I urge readers posting comments to consider them very carefully.  My goal is to offer readers an opportunity to post comments that have been well considered and well presented.  Please consider the intended audience for the comments -- policy makers who can affect the future administration -- and how best that the comments can be received and considered by that audience.  Your job is to persuade them that you are raising legitimate concerns that they should consider and should go out of their way to redress.  Polemics and ad hominens are not persuasive; indeed, as I note in the Rules for Comments, I will not approve intemperate comments.  Please moderate your comments for maximum effectiveness.

Please feel free to express the angst you have felt in considering your circumstances and what options to take, as well as the angst you have felt as you were processed through the voluntary disclosure program.  If you feel you have been treated unfairly, please state that.  For example, many of the persons who joined one of the programs are persons who many refer to as minnows and who should opt out of the program they joined for purposes of the civil cost results, but the IRS had made the obtainable results on opting out a black box where the prospect of draconian costs and uncertainty strike fear in taxpayers.  Angst about this  should be expressed to let these decision makers know that much of this is really counterproductive.

Thank all of you for your interest in this blogs and your comments to the various blog entries.

Jack Townsend

89 comments:

  1. Dear OVD program architects,

    As Jack mentioned in above sentences OVD program was poorly designed for minnows. The OVD FAQs had to be more guiding towards minnow actions, so that decisions are not based on fear and uncertainty but on law and regulations. It is not clear how IRS perceives willfulness, non-wilfulness and willful blindness in terms of failure to file FBAR. The IRM manual guidance and real life anecdotal evidence point in opposite directions for conclusions and guidance. It seems that OVD departments and FBAR departments are not working in synch. Minnow taxpayers want to come clean, pay their fair taxes due, follow clear cut regulations and move on with their lives in a reasonable time-frame. (i.e. amended tax returns - 3 months max.) FBAR penalty should be also correlated to the unpaid tax, as to offer greater fairness inside the program.

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  2. Dear Congressmen:

    There should be no FBAR penalty if the following facts are discovered by IRS
    1) Source of funding was from W2 income.
    2) No money was ever cashed out of this account.
    3) The accounts were never moved to any other small back or to any other country.
    4) Never had any debit cards or credit cards issued from or against this accounts
    5) Never created any layers of entities/trusts/sham companies to hide the noney.
    6) All this accounts are in the native country or country of residence & not in the Tax-heaven countries.
    7) Accounts have USA addresses or resident country address.
    8) Tax payer has never been issued any FBAR warning
    9) Taxpayer had no incidence of any non-compliance with IRS or any federal or state agencies.
    10) Taxpayer has no criminal or fraudulent indictment / conviction.

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  3. Undoubtedly, under reporting income is a wrong against the United States whether it was intentional or unintentional. Those participating had to pay the back taxes plus interest, plus at least a 20% accuracy penalty for as far back as 8 years in the later programs. The United States was made more than whole at this point in many cases. To add the huge in lieu of penalty on top is plain and simple abuse. In the past the word is that IRS often asserted 0 penalties in voluntary disclosures. They became gung ho after UBS and assumed anyone with offshore funds was like the UBS bad actors. The real proof in the pudding about these programs was the Tax Payers Advocate report. How can you expect rational persons to risk life altering financial penalties to get right with the government. On top of that consider the legal fees and the two or three years it seems to take to get cases closed. Why? Fortunately, this blog and others have shined the light in a limited way on some very unjust results. 30,000 to 40,000 disclosures is a drop in the bucket when you consider the expat community as well as the immigrant community. I am certain a lot of people are still out there unable to make a move towards compliance because of the bad rap on these programs. I have to believe that with a reasonable and truly streamlined program, compliance would improve and likely even revenue collections would increase. This could be done while reducing IRS resources needed to close these cases. Compare it to being in sales. If you set your margins too high you sell little or nothing and this can hurt the bottom line. The right margin can explode sales and drive the bottom line. The IRS knows this or should. The 2012 27.5% penalty will likely dwindle the number of takers. Maybe that is why the 2012 shakedown is indefinite. They have a big problem in that they have already screwed a bunch of people. How do they make it reasonable now? How do they right the cases that they already closed? Heck, if a bunch more came in what is the time frame for closure? 5 years? There are likely millions that would like to solve these issues but the cost and nightmares required to clean it up is too much and the word is getting out. People are keeping their heads down, dumping U.S. citizenship and trying to find ways to solve the problems that are contrary to IRS guidance. The two main groups of people that have been unjustly harmed are immigrants and expats. IRS should make it right retroactively and then set some sane guidelines to clean up the matter.

    Anon123

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  4. Dear OVD Creative Geniuses,

    It is clear that the OVD programs have employed a deterrence strategy, i.e., a strategy based on threat and fear, when dealing with US persons with overseas accounts who want to “get right with the government”. The target of these programs as stated in OVDI FAQ 2 was to bring taxpayers that have used undisclosed foreign accounts AND undisclosed foreign entities to “avoid or evade tax” into compliance with United States tax laws.

    Information about the OVD programs reached many expats and immigrants, a.k.a “benign actors” or “minnows”. From repeated testimonies available on many blogs and from American Citizens Abroad, many of these minnows were not so much afraid as they wanted to “do the right thing”. As education about some of the forms in question has been documented to be lacking - for expats see Taxpayer Advocate Report 2011 to Congress and for immigrants note that information provided by the US government for new immigrants has heretofore not mentioned the key form in question, the FBAR (TD F 90-22.1) - many of these minnows were horrified to find out that they were non-compliant. These people entered your OVD programs in order to correct the past and meet their civic duties. They were burdened with onerous and time consuming documentation requirements. They were shocked when they realized they would be presumed to be guilty of evasion and treated accordingly with only a vague, nondescript and expensive process available to them for presenting their specific facts.

    The behavior of these minnows provides strong empirical evidence for the concept of “tax morale” which is obviously not practiced by the IRS. This is a modern 21st century concept, which involves respecting your taxpayers and assuming that they have a certain amount of civic virtue and trust in their tax office. The obvious consequence of this assumption is that is necessary that taxpayers be treated with respect and understanding to promote and preserve a compliance producing attitude.

    The IRS seems to be rooted in an archaic approach. Other countries have implemented the tax morale concept with positive results. For a view of a first hand experience with this, take a look at one of the comments on the Taxpayer Advocate Blog from a dual national familiar with both systems. http://www.taxpayeradvocate.irs.gov/userfiles/file/NTA%20Blog%20Comments%204%205%2012(1).pdf

    Current treatment of minnow participants has damaged the relationship between the taxpayer and IRS to the point that many are seeking to renounce their US citizenship and justifiably, it is spreading virally to stay non-compliant and/or not correct the past because as a minnow, you will be treated like a criminal. In these compliance and revenue generation aspects the OVD programs have failed.

    What the IRS can do to move into the future and promote compliance is to begin to show respect for minnow tax morale by:
    1) Providing clear guidance for the OVDI participants who wish to opt out as to what to expect and how to mange this process efficiently and economically.
    2) Implementing a policy of automatic issuance of a warning letter for overseas resident OVDI participants and allowing payment of back taxes and interest as sufficient. As OVDI stretches back 8 years, well beyond the normal statute of limitations, the interest many OVDI participants will incur is penalty enough.
    3) For those who have not yet become compliant, making a clear distinction between those who should follow FS-2011-13 for overseas citizens and those who are targets of the 2012 OVDP program. Guidelines for how each process will function should be published.

    I offer you my humblest apologies if I have misunderstood and your intention for the OVD programs was to create and promulgate a complicated, torturous and expensive process for both the “minnows” and the IRS.

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  5. Dear Congressman Capuano, Senators Kerry and Brown, and Commr. Shulman,

    I am a resident of Massachusetts and would like to bring to your attention the much touted Internal Revenue Service program regarding disclosure of offshore accounts by US citizens in so far as it applies to US citizens who are living outside of the US. For the record, I have no stake in this controversy and am writing this letter to you solely as a concerned citizen and I urge you to take notice.

    I suggest that this IRS program goes a long way towards highlighting the inequity of the US tax system in that it highlights prosecution of ordinary people. Thus far very few "1% ers" have been prosecuted under the program. So it seems to any objective viewer, the powers that are within the IRS have created the counter-intuitive situation where a program putatively designed to bring people into compliance after the debacle of UBS, actually achieves the exact opposite effect by giving those with financial means the confidence and ability to continue to game and thereby undermine the system.

    For sure the program will attract people to it, but that quality of participation does not demonstrate its success: honest people will always be attracted to a program to make their situations right especially if they became non-compliant inadvertently and not by design. Conversely, tax scofflaws will not be interested in participation, and will continue on their merry way, knowing that they are probably safe from any form of serious investigation and payment obligation. Why does that make any sense?

    The stories of personal torment, which ultimately translate into inequity anger, resentment and alienation, are well recounted here by others, and I do not repeat them. However, those anecdotes should serve as a harsh warning to those who would portray the US tax system as fair and balanced. Commr. Shulman please take note.

    I would you all to reconsider this program and to engage in damage control by limiting this program to true transgressors and giving inadvertently non-compliant citizens a once-off pass along the lines of the commentary here, thereby allowing them to become the tax compliant citizens they want to become. This ill-conceived program places a serious obstacle in their paths and should be removed.

    Respectfully submitted,

    PATRICK CARMODY

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  6. Dear OVDI administrators, and affected taxpayers,

    To date, both the IRS and congress have been deaf to all representations made to them via TAS, TaxAnalysts, Tax Notes Today, and individual tax practitioners. Instead of continuous improvement in the programs, each iteration of offshore "amnesty" has worsened rather than improved conditions for participants. Despite the excellent intentions of our blog host, I do not expect this to change.

    As a consequence the true value of this blog will be to provide a concentrated resource that possible immigrants into the US, current immigrants in the US, and dual US citizens living outside the US can use to inform their future decisions. People considering immigrating to the US can use it to decide whether they should go elsewhere instead. Immigrants already in the US can use it to help them decide if they should plan to leave, and when. And dual US citizens living outside the US can measure the benefits of renouncing their US citizenship against the difficulties of keeping it.

    More than a stark reminder to the IRS and congress of ill conceived plans and regulations, this blog will stand as a beacon to warn away those who might otherwise desire to become or remain US taxpayers, either as immigrants to the US or as full US citizens.

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  7. Dear Congresspeople and IRS Lurkers,

    I think it is important for you to have precise information on the economic damage you are causing minnows in addition to that caused by disproportionate penalties for the FBAR. As has been noted previously, many immigrants and expats entered OVDI because they were conscientious and wanted to “do the right thing” to correct any inadvertent omission they may have made. They followed the only instructions available during most of 2011 and earlier and entered OVDI.

    As many OVDI minnow participants are immigrants or long term overseas residents, many of them employed lawyers because they understood this was the proper thing to do and they thought they would need a lawyer to follow the process correctly and for those living overseas, they wanted someone to be available if they were not. I was one of those who thought like that.

    To give you some precise figures, my lawyer’s costs for reviewing my financial situation and submitting documents were USD 40,061 and my accounting fees were USD 12,250. I do not have a complicated situation, but that is what the lawyers and accountants charged me to tell me and the IRS that.

    As a minnow, I have recently had to abandon my legal counsel because I wish to opt out and I can no longer afford them. They have told me their costs will be greater than my penalty. In our last conversation, my former lawyer told me that people like me, minnows, were suffering greatly since a “one size fits all” policy was implemented. He told me that when discretion had been allowed, he had a client who had USD 300 million in assets overseas and who, in OVDP, faced a fine of USD 60 million. The client spent over USD 100,000 on legal fees and my former lawyers were able to obtain discretion from an IRS agent so that the client paid a penalty of USD 50,000.

    Now, compare that with me, an overseas US person who has lived outside of the US for more than half my life and my entire assets amount to less than 1/1000th of what the client who obtained discretion had. These assets have also been taxed (heavily) in my country of residence. My taxes owed during the entire OVDI period are de minimis (less than in the de minimis example of FS 2011-1. I have been told by my former lawyers that although I have favorable facts I should I not opt out because THEIR fees for opting out would be greater than my potential penalty. If I want to use them to opt out and show reasonable cause to avoid a potential penalty that is less than my legal fees to date, I will need to spend almost as much as the client who had USD 300 million overseas.

    Had the OVDI program been designed thoughtfully and considered the fact that benign actors might be swept into the net, even if reasonable cause arguments were not allowed in the program, a clear opt out path which would allow some estimate of the effort and financial costs for opting out should have been made available to these minor transgressors.

    It is clear that the program was designed not to give “big fish” tax evaders a free pass, but is this really necessary for a minnow who found out that they had made the same technical error that was being used to catch a whale and who followed the only instructions available at the time and joined OVDI? Was the goal to hurt inadvertent violators financially in every way possible and alienate them? Is this the kind of success that was envisioned? It is very much the reality.

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  8. I am an American Living Abroad. By necessity I must have "foreign bank accounts" in order to live my life with my family, because I am in a Foreign Country. I have never invested one cent of money earned in the USA in these foreign bank accounts. I resent being placed in same category of Americans Living in the USA who have hided foreign bank accounts to avoid paying US taxes. I have no reason to hide anything, if for no other reason because the taxes I pay in the foreign country where I live receive credit when I declare US IRS Return. So, why are you after me? Since 2009 when I discovered by chance about FBARS my life became a nightmare. I have consulted US lawyers and CPAs and have had conflicting advices, all of course for a fee. This is now affecting my personal and professional lives. I don´t know what to do. But I know I can´t go through this year in, year out. Something is wrong and I think this is not coming from me.

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    Replies
    1. My friend, if it is any consolation you are not alone. Many immigrants and similarly placed expats have lost their life because of this nightmare scenario. This is a financial genocide of expats and immigrants if i may say so. Ironically there are two categories of people. Both understand there are millions impacted. One set has decided that whatever happens to the majority happens to me, hence i am maintaining status quo and they are sleeping well. The other category are people like us who are walking zombies.

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  9. Apparently OVDP/OVDI was designed for the 4,500 or so UBS clients who had used entities combined with foreign accounts to actively hide money, and who faced imminent disclosure of such accounts. A percentage of assets was seen as a way to dispense quick, rough, and predictable justice.

    Another 25,000 people, most of whom had only earned passive interest income on their foreign accounts and had established such accounts for legitimate reasons (often funds of foreign origin such as sale of real estate abroad, foreign inheritance, savings from money earned while living and working abroad) decided to do the right thing and correct past mistakes, but joined OVDI only because it was the only mechanism sanctioned by the IRS (as opposed to "quiet disclosure" or "forward compliance.)

    I do not recall any commenters on this blog complaining that they owed taxes, interest, and a 20% accuracy penalty on unpaid taxes. The complaint has to do with onerous penalties for failing to file the FBAR form, and with the fact that these onerous penalties are set as a percentage of the account, with no regard as to how the principal earned. Thus, someone with $500,000 derived from previously taxed foreign wages, home sale or inheritance, faces the EXACT SAME penalty as someone who created a phony foreign shell company in order to hide $500,000 of untaxed income. That is just not fair.

    Since taxpayers are already required to provide amended returns going back eight years, it would be a simple calculation, resulting in a more fair result, to base the FBAR penalty as a percentage of unpaid taxes. This would have the added benefit of saving individuals the time and legal fees of opting out, and save the IRS the time required to process opt outs and individually consider the merits of each case. Many lawyers, in published articles and blogs like this one, are encouraging taxpayers with good facts (legitimate source principal and only unpaid taxes on passive interest) to opt out, often as a do it yourself project without legal representation.

    As a further simplification, the IRS could require only four years of amended returns, and simply calculate taxes and penalties as if those four years were typical of the past eight (i.e. take the result for the past four years and double it.) This would cut in half the amount of time and money spent by individuals in obtaining bank statements and amending returns, and cut in half the resources spent by the IRS auditing such returns.

    Finally, I doubt the purported success of this program. True, 30,000 disclosures have been made, but these are a tiny fraction of estimated noncompliant accounts. If you consider the number of tax havens in the Caribbean and elsewhere, as well as the number of dual citizens living and working in non-tax-haven countries such as Canada, in Western Europe, and so on, the disclosures to date are a drop in the bucket, perhaps 3% of the total accounts that should file FBAR forms. It seems that the 25,000 non-UBS customers who have disclosed their accounts with the intention of doing the right thing are outnumbered by those who will not disclose and will simply choose to actively hide their money, something which is easy to do for dual citizens and Americans abroad.

    Thank you to policymakers who take the time to read this, and to Jack Townsend for providing this opportunity to comment.

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  10. Part One:

    I was born in the United States and lived there until I began graduate work in Canada in 1986. On February 28, 2011, I relinquished my United States citizenship because of HEROES (2008), and its requirement of an exit tax which is a violation of United States expatriation Act of 1868, the Freedom of Emigration in East-West Trade, USC Title 19 § 2432, and international law--particularly when applied to someone like me, who has all his wealth in another country, Canada, where it is part of the Canadian tax system and was never earned in the United States. Was HEROES designed to destroy my life? I decided I had to relinquish my United States citizen before I became a covered expatriate, in order to protect my wife and her wealth, not just my own. You see, I am married to a Canadian, and she is the top earner in my family. HEROES is the financial version of the Berlin Wall, an attempt to keep rich Americans in the country. But it affects normal every day US citizens living in other countries.

    I was once proud to be an American. Now I experience only deep frustration with my former citizenship. It is because of the laws passed by Congress. Take for example FBAR. It is a violation of the spirit of the 4th Amendment, which requires that information of this sort be handed over to the government only because of a specific warrant with the person's name on it. It is a general warrant treating everyone with foreign accounts as though they were suspects of a crime. Handing over the account information at this point, now belated because I didn't know about FBAR requirement, is a violation of my Fifth Amendment rights not to incriminate myself (I am not the only one saying this, but some courts seem to be agreeing with this view). So if a major criminal like a Tony Soprano could plead the Fifth to avoid FBAR, how much more a law abiding citizen living in a foreign country? This law is an extreme violation of the constitutional rights of law abiding United States persons living abroad.

    By the way, I have indeed filed my taxes for the last 10 years at least. I have been in compliance. It is a colossal waste of time and money both for me and the US taxpayer, because I've never owed anything. But the filing requirements on citizens abroad, especially those who own businesses, and the non-exemption of the Canadian Tax Free Savings Account, were other factors forcing me to relinquish my United States citizenship. Now that I am no longer a US person, I have opened a business, and I am able to enjoy the same rights and privileges (i.e., tax breaks) that other Canadians enjoy. This is a high tax country. I am not avoiding taxes by living in Canada. I came here to study, and I met my wife. So I stayed. Is that un-American?

    Let me say this: I used to love the United States and the American people. Now my feeling is not love at all but a deep resentment for the treatment of expats around the world, but especially of those in my adopted country of Canada. I, along with five other Canadians experiencing similar issues, started a website called the Isaac Brock Society. We protest the treatment of US persons abroad. Only one other country has extra-territorial taxation of its citizens: Eritrea--and the United States has condemned Eritrea's extra-territorial tax on the official record. Well, I condemn the United States for taxing its citizens abroad. It is an odious practice that has lead to great economical harm to the United States, due to it citizens being unable to live freely in other countries and therefore be able to expand the United States' missions and exports around the world.

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  11. Part two:

    Now recently, the Offshore Voluntary Disclosure program has been used to attack law-abiding residents of Canada and other countries who happen to be US persons. It has created a great dread among us, and many of us are renouncing our US citizenship, and will experience lifelong scars as a result of the shoddy treatment that we have received at the hands of the United States government. The laws have made anti-Americans out of us. If bad publicity is what the United States wants, then by all means, continue with the current extra-territorial tax and offshore account policies. This means that few of us have a desire to spend our money in the United States; on Florida real estate, Disneyland, or Hawaiian vacations. Some of us who see apples from the United States choose New Zealand galas instead. Few of us retain any feelings of loyalty and patriotism towards the United States, but only a feeling of regret and nostalgia, of what once was and now has been lost. The greatest, freest country in the world has become a starving predator seeking taxes high and low, to the point of stalking its own citizens abroad. It disgusts me. And it offends my new patriotism for Canada whose tax base is being invaded by the extra-territorial claims of the United States. I will not stand by idly but I will fight this, because the well-being of my country and my compatriots depends on it. God save the Queen!

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    Replies
    1. After you relinquished your citizenship, do you still have obligations and responsibilities to the IRS?

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    2. I hope at some point soon to have a guest blog on this subject. I have to rely on other experts for that, so I don't know exactly when it will be posted.

      Jack Townsend

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    3. Jack,

      Also, if you could recommend lawyers that worked with clients who relinquished their citizenship or surrendered their green cards.

      The process is fairly easy for people with most people but for high income individuals , it gets complicated with the "exit tax"

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  12. I'm one of those who did not know this responsbility given my VISA status. Now i became aware and want to do it right. I want to make it right but not by paying this huge in lieu amount on my already US taxed savings. I'm afraid to just amend the past without going into OVDI as irs faq's are scary and kind of threatening. Normally if any other error was there, this is allowed without threat but foreign interest income no, we are being warned.
    Afraid to opt out as opt out faq is also very scary. Now want to atleast do it right from current year. Guess what, I've not met a single person yet who is doing it right even this time due to fear factor. They too want to right it but the fear is so high. Even I'm made to think what if you do right this time and they catch you. I thought intention was to bring folks into compliance. Even IRM suggests that there is agent dscretion to just ssue warning letter if that would be enough to ensure future compliance. But the ovdi faqs are preaching in different language. I dont know what to do. I want to right it atleast this time in the hope that if get audited for past, i will perhaps be given a warning letter.

    Dear congressman and irs, please note that this ovdi and ovdi faq is scaring people to even right it in future therby negating the sole purpose of bringing compliance. For the best interest of the country and its people, I will request that some fairness be applied:

    1. Is source of income legitimate and are funds already taxed in US. If yes, should be considered with leniency.
    2. The penalty should be a % of tax owed instead of the principal value.
    3. Benefit of doubt should be given to individuals who are non residents by their status but resident for tax purpose. Many are learning this only now. Expats should be treated same way. Its not fair to assume that each individual should be aware of all tax rules which are not so easy to interpret.
    4. Opt out should get better guidance instead of threats or simply quiet disclosure should be allowed if owed tax amount is < 5K per year or over all for all years in question is < 15 or <20K or something.
    5. Is tax amendment necessary or just provide data for all years in question in single sheet and apply flat 30% tax rate on interest income and 30% in lieu penalty on this interest income and pay off. Or just take single 50% of interest income for each year over last few years and be done, less overhead for all stake holders.
    6. Other option is keep the scheme as is with one exception that flat 5-10K penalty gets applied across the board for small actors. So amend the returns, pay the owed tax for all aplicable years and then just pay off one flat 5-10K lum sum amount for your honest error.
    7. Do not scare middle class folks and revise the scheme to bring true compliance as well get the revenue (like Black Friday, stores make more profit even though they have great sales).
    8. Please keep in mind that most of the folks who are small actors will not be in position to fight out in court and also you can prosecute them but cannot get the huge penalties when they don't even have that kind of money. Is it worth it to collect 10K of tax or so. So its a loss-loss situation for both.
    9. What is the benefit of making people lose their sleep, jeopardize their lives..you cannot imagine the tensions that we are having now. Its a great set back for the people and the nation.

    I hope someone in power reads these blogs and assess the wrong it is doing to honest salary earning folks.

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  13. This is my first shot at offering proposals. I make my offering as a comment since my proposals should be treated the same as other comments. I may add other proposals later or refine these, but this is a quick and dirty first round. I use a term of art here that people have used on my blog, but I think I should define my understanding of the term. By "minnows" I mean taxpayers with no reasonable risk of criminal prosecution and with relatively smaller amounts in the mix that would be taxed and subject to the various penalties, principally the in lieu of penalty. I could add a lot to further refine that profile, but I think readers will get the point:

    1. The IRS should have a "touch it once" program whereby the first "auditing" agent (and his reviewers) set the final position -- whether it be the current inside structure or the outside audit structure. This should make the IRS more efficient and make the process less painful for taxpayers who have voluntarily disclosed. This would be like FAQ 35 in OVDP 2009 when it was working.

    2. The IRS should publish parameters for how it is applying the audit results for the FBAR penalties. A lot of people are not joining the program because they know they should not get the heavy inside the program penalties (they are not the worst offenders for whom those penalties were designed) but they are fearful of the draconian penalties that the IRS says can apply in an audit (whether by opt out or otherwise). I think this will encourage a lot of "minnows" to come in because a lot of them really would like to get right with the IRS but at a reasonable, fair cost. Right now, the opt out audit result is a black box that, I think, is counterproductive for getting people into the system both retrospectively and, in some cases, prospectively. The IRS should now have a large enough data base of experience to design the parameters.

    3. The IRS should impose light audit FBAR penalties for all except the worst offenders. Moreover, for those who come into the OVDI program, the FBAR penalties should be 1/2 the FBAR penalties that would be applied on audit, so that there is an incentive to come into the program rather than either attempt a quiet disclosure or do a go-forward only. Right now, if the "minnow" with no material risk of criminal prosecution comes into the program, he will often be reasonably assured that the opt out audit result will be better. But, right now, the IRS says the opt out audit result is the same that the taxpayer would obtain in a real audit having no relation to the program. That means that, for the taxpayer with no meaningful risk of criminal prosecution, he can (i) join the program and get a certain audit but with now indeterminate penalties or (ii) do a quiet disclosure or go-forward in which case (a) he might not get audited and never get any FBAR penalty (or, on a go-forward any penalty, tax or interest for past years at all) but (b) in all events no worse than if he joined the program and opted out. In other words, there is no incentive for a taxpayer with no criminal risk profile to join the program. The IRS should give that taxpayer an incentive to join -- just as the IRS gave the worst offenders facing criminal prosecution risk and really draconian risks incentives to join the program. Indeed, from this perspective, it appears to me that the U.S. taxpayers who fare best in OVDP 2009 and OVDI 2011 (and its extension) are the very worst offenders; they avoid criminal prosecution and get penalties inside the program that are less than on audit. The IRS is treating the rich and guilty better than the poorest, weakest, and on a relative scale, most innocent taxpayers. I just say that the IRS should give every taxpayer a meaningful benefit from joining the program and certainly should not give the rich and guilty proportionately better benefits than the "minnows."

    Thanks,

    Jack Townsend

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    1. Excellent comments and suggestions that I hope someone at the IRS in a position to effect change will read.

      You are absolutely correct, that they have the incentive's all wrong in their programs which are not positive for compliance due to the fears that are generated by the IRS practices. I am amazed that they can not see this. I fear that inertia and just plain ole "face saving" gets in the way of modifying programs appropriately and doing the right thing.

      I am working on my comments, questions and suggestions will try to post tonight. Thanks for making this forum possible. Let's hope there are some decision makers that will read them.

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    2. The OVD programs should be renamed to the “Opt out Voluntary Disclosure” programs for minnows.

      Jack Townsend’s call for a streamlined process should not be ignored. Given that many practitioners are recommending that their clients enter the program and then opt out, as well as the fact that many distraught participants are choosing opt out, the renaming would be appropriate.

      In this comment, I would also like to speak to a little addressed reason for streamlining the program. In my quarter of a century as an overseas American, I have had limited, but positive dealings with the IRS. The method of dealing with the matter in question was fact based, efficient and helpful, i.e., professional.

      In OVDI, in addition to the frustration and cognitive dissonance that American expats and immigrants face when they learn that to correct an unwitting error they could face bankruptcy, IRS Revenue Agents must also be subject to the same experience of frustration and cognitive dissonance. The agents assigned to the program can take solace in the fact that they are following the specified procedures, but any agent worth more than diddly squat likely knows that the program rules demand treatment of minnows that is inconsistent with what is found in the IRM.

      On top of that cognitive dissonance, imagine the frustration the Revenue Agents must feel when after hours of auditing (most of the published accounts are of minnows whose “certifications” go well beyond what is described in OVDI FAQ 27), these Revenue Agents inform the client, who they knew was a minnow from the beginning, of their result and learn that because of the unfairness of that result, the minnow chooses to opt out and rely on the provisions of the law. So now they have to spend more hours working on a case that should have been handled like this from the start. It must be hard to them to justify to themselves the extra hours spent on minnows who, when the law is applied, are likely not subject to the life altering fines demanded in the program. Extrapolating from that, how can the Revenue Agent’s managers justify the extra expense to their bosses and to the taxpayers paying their salaries, other than as a face saving exercise for those at the top who did not plan out all aspects of the OVD programs?

      Streamlining the procedures in OVD programs and providing guidelines for opt out, would allow IRS Revenue Agents to return to being efficient. The current situation seems to provide little cost-benefit in the attempts to extract the maximum amount of tribute from minnows, e.g., two politically unrepresented minorities: American expats and relatively new American immigrants.

      Delete
    3. Perhaps a letter to the architect of OVDI at IRS Ms Rosemary Sereti can help?

      Delete
    4. That is good idea about sending it to Rosemary Sereti.

      Delete
  14. someone told us to go to charge.org to get signatures for irs and congress to see.

    ReplyDelete
  15. Dear Congress and IRS,

    Here is a comment from a bewildered minnow trying to figure out what to do to be compliant without him and his family facing financial destruction as a result of your poorly conceived and implemented 2 to 3 year programs:

    Christophe
    April 11, 2012 at 1:57 pm

    @Civic and ij
    Did you actually report your foreign accounts on your 1040 or did you just not report the interest and file FBARs?

    Yesterday, a lawyer told me I was a criminal for not having done it, that I was in deep trouble and my only choice to get out of it was to pay him $20k and do OVDP. This was an experienced lawyer in those cases. He was just stating everything that is on the IRS site. He said all they want is your money (he didn’t mention he was after it too). He also said my wife was in the same trouble since she knew about the account, and that she needed a lawyer as well.
    I don’t know who to believe anymore and what to do.

    Like you, ij, I have had suicidal thoughts. My wife is American and don’t want to leave the country if I am deported. I need help, but don’t know who to turn to…
    I am inclined to just get into that program, pay the $50k or so that it will cost me to end this nightmare.
    That is so wrong to play with people’s fears to get money out of them. I just don’t think the fees are appropriate for the crime. I will loose 3 times what’s on that darn account that I should have closed when I moved here.
    I wished I wasn’t married with kids, so that if I get kicked out, it would impact only me…

    Can you not see that your treatment of these cases borders on mental torture. You have people that want to do the right thing but they are paralyzed by fear and uncertainty driven by the unjust greed of your programs. You are in essence driving decent people to noncompliance. You need to fix this in the interest of fairness and promotion of compliance. I hope Moby and Just Me will post comments here as well. I also hope some of the distinguished attorneys that have commented on this blog will post here as well.

    Anon123

    ReplyDelete
    Replies
    1. It does not border on mental torture. It is the worst form of mental torture.

      Delete
    2. For immigrants who come from China/India and other countries with currency controls/blocked currencies and who have inherited assets or left money behind when they came here this is a financial death warrant.

      Delete
    3. Please don't feel like a criminal. The real criminals are in the US Congress, the IRS offices, and the private law offices.

      You should protect your money, not trust US Congress, the IRS or private attorneys. As you see, they all want your money.

      Keep it well hidden.

      Delete
  16. The program was designed to deal quickly and efficiently with UBS clients who had hidden money using foreign entities and who were about to have their accounts disclosed.

    It was NOT designed for people who failed to report their accounts and some passive interest, and who upon learning of the reporting requirements, decided to do the right thing.

    Yet both groups are being treated the same way.

    It would be fair, and simple to administer, to simply base the penalty on the amount of unreported income, instead of the highest account balance. This would result in a proportionate result, that would deal with various "shades of gray."

    The IRS is already collecting the required information in the form of amended returns over eight years. All that is needed is to take the accuracy-related penalty and raise it to a higher percentage.

    If something like this is not done, then many (including myself) who joined OVDI will choose to opt out.

    ReplyDelete
    Replies
    1. Anonymous,
      In the first para, you state the purpose of the program. it is for those who had hidden money using foreign entities. you are not one of those and you know that. So why did you enter? Now you are threatening that you will opt out. I simply do not understand the logic. you seem to be very confused.

      Delete
    2. In fairness, what Anonymous is stating is what he "THINKs" the purpose of the program was. It is what many of us have come to THINK it was, based upon circumstantial evidence, but there is nothing from the IRS that specifically says that is the case.

      So, I understand the logic of entering and then Opting Out, even though it seems such an inefficient waste of taxpayer and IRS time.

      You can not depend your "assumptions" of what you THINK the IRS was intending, as they have not specifically said except as expressed in the term of "hidden" and that depends on your definition of what "hidden offshore accounts" means. Anything without a 1099 issued by the financial institution is probably "hidden" from the IRS prospective. But then, I am guessing.

      The IRS should not have relied on such vague and general guidance for these programs, and then Minnows wouldn't all have to guess as to intent.

      Delete
    3. Remember that when the 2011 program was started, the IRS basically said that was the ONLY approved way anyone with a foreign account could disclose their accounts. They said they frowned on silent disclosure, they said that even if no tax was due (no tax due to foreign tax credits, for instance), one could not simply send in delinquent FBARs, that there was no 'de minimus' income that would be considered acceptable.

      I can understand why they did that -- they wanted to force genuine tax evaders into compliance. But there are a lot of people: immigrants, expats etc. who are not willful tax evaders, but who did not see any alternative to joining the program. Undoubtedly, some practitioners pushed the program in cases where it was not appropriate.

      So people could most definitely have joined the program in error.

      Delete
  17. Dear senior officials of IRS and Govt, you are simply scaring me to come forward and get in compliance. Past was a mistake due to lack of right knowledge. Present and future should be done right but you are scaring me for the same. I think and may be many others are thinking alike that your way of getting people in compliance is actually scaring them to come in compliance. You will get real criminals or bad guys into compliance for sure by your scheme as its a great offer to them but minnows are being scared to stay out of compliance. So, unless the scheme is revised, its doing the opposite of what it was designed. If intention was revenue collection, trust me, you will get more money if you give some leverage to the minnows. At least you will collect back taxes from minnows which itself may be millions or billions if each on average owes 1K per year.

    ReplyDelete
  18. If you do not value US citizens who live (or are born) outside the US, and you believe we have no good reason to exist outside the US borders; then just simply let us and our children go our way and let us officially sever our inherited ties - without having to pay you dearly for the privilege. Otherwise, children born outside the US, inherit the US tax obligation, but no benefit. Imagine knowing that every child born to you is born into a draconian reporting and penalty structure - which is impossibly complex to comply with - and fraught with pitfalls that make errors likely - which can bankrupt your whole family - even with no tax owing, and completely legitimate source funds. No banks or financial institutions report the values you require in the formats for FBARs and FATCA - they report reconciled balances - poring over every single entry for the annual disclosures of our entirely legally earned savings is full of potential peril. Our funds are fully overseen and reported to the governments where we live and work and pay taxes (and in many cases - where we were born). Any additional relationships - ex. adopting a US child, marrying an American, helping family via POAs, volunteering as a treasurer or board members in our community charities and professional associations - all threaten to expose us to multiple additional risks of inadvertant error, and expensive accounting bills. But yet, we are no more likely to be criminals that our brethren inside the US. None of the announcements about fair taxation, or the plight of the working class inside the US applies to us. We are only spoken of if it is in the same breath with criminals hiding assets. We never hear you raise concerns about our wellbeing or issues.

    If you do value us - and truly have any respect or regard at all for the US citizenship we have inherited - then we are deserving of respect as your fellows - and so the maltreatment and suspicion with which you so continually describe us is unwarranted and unethical. The US cannot have it both ways - we are either equal fellows, or we are not - unless you feel that simply possessing power justifies using it without restraint or consideration - when applied to those outside the US who have little or no voice or influence. In our countries of residence, we are teachers, and police, factory workers, parents.... just the same as those inside the US. Those countries value us and treat us as equal to their own native born citizens. Therefore, where should we feel a greater allegiance - to you who call us evaders, criminals and shirkers, or to the countries which provide us services, treat us well, and allow us to have a voice and participate in our governance?
    The choice is very clear - treat us as equal brethren, or let us go without having to buy our freedom.

    ReplyDelete
  19. Open letter to IRS Commissioner Shulman,

    I am taking the opportunity Jack has provided to address you in an open forum. I have written you twice before, once at the beginning of the 2009 OVDP, and once again as I was nearing completion of the OVDP in 2011. In that final letter, I was starring at the penalty abyss at the end of a long process you now tout has highly successful in both a compliance objective, efficiency, and in generating new revenues.

    I must respectfully disagree.

    While the responses to my letters were appreciated, the lack of any serious consideration of my pleas at the time greatly disappointed me. I naively believed that you too would see the “bigger picture” of the compliance problem that I was seeing. I was being directed into a program not appropriate for a minnow like me. However, the language of your FAQs left a person who was now aware of a benign compliance failure with almost no option but to enter the OVDP. On advice of Council, I did. In retrospect, that probably was the wrong decision.

    My two letters are publically published, so all can see my attempts to communicate a desire to do the right thing. I wanted to become compliant without suffering disproportionate penalties as a result. The OVDP did not provide an efficient route for such an effort.

    http://bit.ly/y5NQr4

    The purpose of this comment is make six (6) specific recommendations for modifying your programs on a go forward basis.

    As a preface to these recommendations, I want to ask five (5) basic questions about your claims of success not asked by any journalist in any publication to date. Hopefully they will promote some “self reflection” on how effective your OVDP/OVDI programs have been if “compliance and efficiency” was really the goal when you launched them.

    Efficiency:

    What conclusion can one draw about the efficient use of IRS and Tax payer time, if a process to bring a non willful minnow into compliance, takes 851 days from start to final reconciliation?

    As a leader of a Large Business, as I have heard you describe the IRS on Cspan, this inefficiency should concern you. If it takes that long to process a US person who was not willfully evading taxes by hiding funds in secret accounts offshore; whose failures were due to benign inattention and lack of understanding of the unique nature of US Citizenship taxation; and who had no knowledge of FBAR requirements, wouldn’t a reasonable person naturally question what is wrong with process?

    I have read your recent address to the National Press Club, where you speak favorably of your ‘myopic’ focus on priorities. I would respectfully suggest that this focus on offshore accounts has lead to ‘willful blindness’ on your part. You seem unable to see the far reaching negative effects of a policy that, in opinion of many respected tax attorneys, the National Tax Advocate and ALL minnow participants in your program, has been terribly misguided in its application.

    Was there not a better way to “front end” filter the non willful minnow rather than grind them up in the process with only a “back end” Opt Out relief added ~19 months later on June 1st 2011, which has proved to be such an inefficient use of IRS and Tax payer time?

    Your current programs certainly fail the efficiency test. It has wasted examiner time. It has taken an extreme and unnecessary toll in emotional capital and Life Credit Units (LCUs) of taxpayers which do not show up in any revenue stats or on a reconciliation spread sheet. That cost alone was a significant drag on efficiency, good will and compliance.

    If compliance is an objective, why won’t you release meaningful stats to support that claim? We want to judge the actual effectiveness of your punitive approach to compliance as contrasted say, with an alternate educational outreach strategy which could have included a real amnesty for benign and non willful FBAR and offshore income tax reporting failures.

    Cont...

    ReplyDelete
  20. Part II cont…

    - Questions:

    So far you have given us two numbers as evidence of success.

    33,000 total participants and $4.4 Billion in revenue collected.

    Even the novice accounting 101 student knows that two numbers do not a story make!

    Single total numbers without comparison stats have no meaning. We need other numbers for context. So far you have failed to provide anything more either voluntarily or by FOIA requests. We need percentages. We need historical comparisons. We need participant data. We need unit measures. We need original goals. Without these, we can not assess your characterizations of success.

    Q.1.

    Of the total population of OVDP /OVDI participants, what was the Minnow to Whale ratio?

    To judge success we need to know what portion of the total joiners were your target UBS type evader Whales who was deliberately engaged in evasion schemes by hiding millions in secret accounts offshore? What portion was just the Minnow expats and immigrants who recognized their compliance failures and wanted to “do the right thing”?

    Were Whales 30% of the population or 70% ? Were Minnows 10% or 90% ? A Minnow to Whale ratio would give us and you a better an indication of the success of your VDP efforts.

    By extension how many participants had overseas addresses and how many were relatively new immigrants to this country as compared to the “Homeland” evader demographic we think you were targeting?

    Q.2.

    What was the actual increase in FBAR compliance as represented by a percentage?

    I.E., did we go from 3% to 4%, or 2% to 10%, etc? What compliance percentage would you consider successful? Are you targeting 10%, 30% or 90%?

    Any claims of success must show this. Surely you must have estimates of what the total population of FBAR filers “should be” that you can now compare to the increases that have occurred as a result of your efforts. What was the starting base line, and what is the 2011 FBAR compliance number now? Please provide us some hard numbers to calculate percentages.

    Q.3.

    Was there a FBAR educational outreach effort you could have employed that would have been more effective in increasing compliance if that was the goal?

    Did you follow any of the Enhanced Outreach and Educational Guidance, as issued in the Sec of Treasury Report to Congress April 24, 2003?

    http://1.usa.gov/ILjYXb

    There are 10s of millions of Expat and Immigrants that have normal funds in their home country or country of residence for many reasons unrelated to hiding funds from the IRS offshore.

    Where was the educational effort? Why were so many caught totally by surprise at your sudden enforcement of an administrative form we had NEVER heard of.

    Q.4.

    Of the total revenues collected, what was new taxes collected and want was just FBAR or “in lieu of” penalties?

    Are you being effective in getting new tax streams, or are you just co-mingling penalties and tax revenue with no recognition of the distinction? What portion of these revenues are just a one-off ? What portion will be re-occurring? I.E., if foreign tax credits from high tax countries offset U.S. taxes, then what is the re-occurring income tax R.O.I. for all this enforcement effort?

    Q.5.

    What was the “cost vs benefit” analysis that you did prior to launching these VD programs to show that such extensive use of IRS examiner resources was a cost effective way to increase compliance?

    You say you are a BIG business, so that is what a BIG business would do! It seems like your VDP with all its ‘examiners’ has been very expensive to operate. How has the cost/benefit analysis compared to the actual cost of operating the program with its lengthy processing time?

    What is the average processing time of a taxpayer from “get to go”? In my case it was 851 days. Am I the ‘mean’ or an ‘outlier’? What did it cost the IRS to process me versus the TAS negotiated reduction you took from me for a benign failure? What is the average processing cost per participant?

    Cont…

    ReplyDelete
  21. Part III cont..

    -Recommendations

    I know you are leaving office soon. Before you go, I ask that you just take some self reflective time to ponder the answers to these questions above. Honestly reassess if there isn’t a better way of creating an atmosphere of compliance and additional revenues without resorting to such an inefficient approach.

    I think any objective observer, without a personal investment in creating this process, would see that:
    The IRS application of a ‘one size fits all’ OVDP penalty regime for minnows is inefficient in process, punitive in application, confiscatory in practice, destructive of the IRS trust and not positively corrective in its compliance objective.

    Here are my 5 recommendations:

    One:

    Man up! Re-establish badly damaged IRS credibility and trust. Affirm Nina Olson’s TAD on the “bait and switch” nature of the 2009 OVDP. Respect the spirit of the law which created the TAS and respond publicly.

    Two:

    Redesign the OVDI program to either have a front end opt out for minnows utilizing normal IRM discretion, or reinstitute FAQ 35. Alternately allow quiet disclosures for non willful, non criminal behavior for benign actors to have an easy route to compliance.

    Three:

    Design a positive educational outreach as the Secretary of Treasury said you were going to do back in 2003. Do not be just penalty/revenue focused, but work to positively engage and encourage compliance of those that remain unaware of the FBAR and the unique nature of US citizenship taxation requirements.

    Four:

    Work with Congress to eliminate the duplicate reporting of the FBAR and FATCA form 8938 for Homelanders. Eliminate it for Expats. Take seriously those paperwork reduction notices that you print at the bottom of your forms.

    Five:

    Redesign the VD programs to model the Canadian approach which states this:

    “The Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA. Taxpayers may avoid being penalized or prosecuted, if they make a valid disclosure.”

    http://bit.ly/b6akME

    If you were not so short term penalty/revenue orientated in your VDPs, you might have better success in compliance outreach and actually generate more revenue over the long term than your current approach.

    Six:

    Finally, work with Congress to do away with the unusual Citizenship taxation model and move to a Territorial system in alignment with the rest of the OECD. The U.S. is acting hypocritically when it enjoins UN resolutions condemning Eritrea for taxing its Diaspora overseas while doing exactly the same thing! See SC10471

    http://bit.ly/w2db3f

    The cost of compliance and complexity of the citizenship model and the 2010 FATCA requirements associated with it, is very detrimental to the ability of U.S. Expats and GC holders to work and live normally overseas where they already pay taxes higher than in the U.S. Homeland. It also makes the IRS enforcement task practically impossible and strains your resources!

    I encourage you to read this American Citizens Abroad (ACA) working paper on a Residency based taxation initiative which has been submitted to Senate and House Committees dealing with taxation issues.

    http://bit.ly/IoqAtN

    Congress by statute and the IRS by action have made pariahs out of U.S. citizens abroad. More and more they are finding the compliance hardship, costs and penalties (NOT THE TAXES) the biggest detriment to maintaining US citizenship. It is coming down to stark choices for many to renounce or relinquish their citizenship as a suggested option by the IRS’s own Branch Chief, Elizabeth Karzon, from the office of Associate Chief Council, Branch 1! I do not think that is what Congress really intends, but the search for revenues over seas is poisoning the international waters. Congress should be solely focused on its territorial tax system, not a world wide one!

    Thank you.

    ReplyDelete
    Replies
    1. Thank you Just Me.

      Fantastic analysis and arguments.

      Shulman won't face this challenge. He will quietly walk into his retirement with the brownie points he has supposedly earned at Capitol Hill.

      Delete
    2. Couldn't have said it better!

      Delete
  22. To all immigrants,expats and to the IRS Honcho's:




    I reference below the link to Moby's 13 page opt out argument. It has been posted before. This should be a cornerstone of logic and truth to opt out and argue for no in lieu of penalty. It is amazingly complete, truthful and well written with sound documentation. This was a great service by Moby to post it to Google. Use it to defeat the extortion of your assets by this rogue government and the IRS. May their system be clogged with opt outs to the point that they realize their injustice and correct it:

    https://docs.google.com/file/d/0B9jApOZcF0AQVFozeW5qemdUWG1BLWp1djdwWVd2Zw/edit?pli=1

    Anon123

    ReplyDelete
  23. I joined the latest program because I wanted to correct past mistakes in the only way sanctioned by the IRS (noisy disclosure.) I think it is fair for me to pay unpaid taxes and interest and 20% accuracy-related penalty thereon, so I am not complaining about that.

    However, since my capital was legally earned and previously taxed, I believe it is inappropriate to be assessed penalties as a percentage of principal (as opposed to based on what little unreported income I have, less than 2% per year on average.) Therefore I will almost certainly opt out. This will mean extra time and legal/accounting costs for me, and additional work for the IRS.

    Others are not doing as I did, either attempting quiet disclosures, forward compliance, or doing nothing. I do not believe any of these choices are what the IRS wants, yet that is what is happening.

    Here is how to really streamline the program:

    Once someone is notified that his/her data is about to be released (such as the original 4,500 UBS account holders) then it's too late for them, and their only choice becomes the current OVDI with 20 to 27.5% of highest balance penalty.

    For everyone else (i.e. those who come in before their data is about to be handed over)adopt the following simplified method:

    1. Add up all undeclared foreign income for the past 8 years (without segregating it by year or type of income such as interest, capital gains, etc.)
    For example, say the total was $10,000.

    2. Apply income tax at a flat rate of 30% (highest marginal tax rate,) or $3,000 in the above example.

    3. Add an accuracy related penalty of 20% of the tax, or $600 in the above example. (Subtotal so far: $3,600)

    4. For interest, take the average of 6% x 8 years (=48%) and 6% x 0 years (0%) and just apply 25% total interest on the unpaid taxes and accuracy penalty. This would be 25% of 3,600 in the above example, or $900 interest. (Subtotal so far: $4,500)

    5. Apply an FBAR penalty of 25% of total undeclared INCOME. That's 25% of $3,000 or $750. Grand total is $5,250, or 52.5% of undeclared income.

    6. Have the taxpayer pay that 52.5% and be done with it. (IRS could still audit domestic issues, and accuracy of math in adding up bank statements.)

    Such a system would save those entering the program the high cost of legal and accounting fees. And since 52.5% of income would be a reasonable result, it would be rare for anyone to be able to justify the cost of the accounting and legal fees involved in opting out.

    The IRS could process such disclosures without wasting resources that could be better used in auditing other issues.

    Giving such certainty would likely encourage far more taxpayers to disclose, instead of attempting quiet disclosures or willfully hiding, and would bring many more taxpayers into the system.

    ReplyDelete
  24. (I am the Anonymous of 4/12, 12:27 p.m.)
    One more thing ... I believe that if an income-based penalty is adopted, anyone whose case has been closed (except for the original 4,500 UBS account holders) should have his penalty reexamined and pay the newly calculated penalty, if lower.

    ReplyDelete
  25. The economic and LCU price of joining is too high.
    Your implementation and ability to process is a disaster.
    Your own watch dog TAS has condemned.
    Your credibility and reputation and trust has suffered.
    You are driving simple people towards greater non-compliance.
    You are expending and wasting unnecessary resources.
    You have shown the world your true motivation to extort.
    You can not see the forest for the trees.

    ReplyDelete
  26. Not a big fan of Rand or Ron Paul but according to the article below Senator Paul might be one of the only Senators who might interested to take this forum to the congress:

    http://digg.com/newsbar/Politics/rand_paul_digs_in_heels_over_swiss_tax_deal.

    Any "Anonymous" in Kentucky to make the connection ?

    ReplyDelete
    Replies
    1. Not in Kentucky but pretty darn close in Tennessee.

      Anon123

      Delete
  27. Few Americans abroad are aware that they are required to file an annual income tax return -- not surprising as no other countries in the industrialized world impose such a burden on their citizens abroad. Naturally, fewer still are aware that they must file an annual Report of Foreign Bank and Financial Accounts (FBAR) to the Department of the Treasury, which is a tool intended to crack down on intentional tax evasion, organized crime, terrorist financing and drug trafficking.

    In light of this, the IRS' enforcement of the FBAR filing requirement against innocent Americans has been heavy-handed and uneven. What is worse, Americans are being prosecuted for wholly innocent errors or omissions on the FBAR and facing penalties that are literally consuming their life savings and their pensions and, consequently, wreaking untold havoc in very aspect of their lives.

    While the IRS touts the various Overseas Voluntary Disclosure (OVD) programs as successes, it completely fails to mention that of the "tax cheats" caught, hundreds are innocent Americans. Disturbingly, the IRS does not distinguish between criminals and bona-fide overseas residents. This means an American selling exports abroad who needs ordinary financial accounts to function or a stay-at-home mom who co-owns accounts with her foreign husband are treated the same as terrorists and drug lords.

    On too many occasions to enumerate, I have been approached by Americans abroad who have been subject to unusually excessive penalties for failing to file FBARs. Worse still is that most of these are citizens who have entered one of the OVD programs and so, by definition, these are folks who have voluntarily come forward to ensure their papers and disclosures are in order. There are so many horror stories its difficult to know where to begin when describing the very real torment and anguish these misguided measures are causing law abiding taxpayers. These people are not criminal tax evaders but they are lumped in the "success" stories that IRS Commissioner Shulman touts.

    Now, we have to contend with the full implementation of the Foreign Account Tax Compliance Act (FATCA), which, among other things, requires foreign financial institutions such as local banks, stock brokers, pension funds, insurance companies, etc. to report directly to the IRS all their clients who are "US persons". Of course, one fear that has come to fruition for many is that financial institutions are dropping their US clients to cut compliance costs. Many US citizens have already had their foreign accounts closed and foreign banks, insurance companies and financial institutions have started to refuse Americans as clients. What is more, foreign investment in the U.S., which reportedly amounts to $21 trillion, with more than $10 trillion of this is invested in U.S. securities could, according to a KPMG survey, be adversely effected. This 2011 KPMG survey indicates that only 36% of financial institutions will comply with FATCA leaving 64% still considering divesting out of U.S. securities. If even a fraction of those foreign investors divest, the loss to the U.S. would be in the trillions of dollars.

    Surely, neither the absurd penalties imposed on law abiding, tax paying Americans, nor the potentially disastrous consequences of the loss of trillions of dollars in foreign direct investment represent Congress' intent in enacting FATCA and the legislation underpining FBAR.

    ReplyDelete
  28. Thanks, Jack, for creating a place for people to comment on this issue.
    You said "The hope is that some Congress members (or their staffs) and the IRS policy makers will read the comments and, to the extent that they state legitimate concerns, address those concerns"
    When the comments reach a critical mass, do you plan to mail them to the appropriate people?
    Thanks for letting us know how and when you're going to deliver the message.

    ReplyDelete
    Replies
    1. I plan on printing and mailing it myself! So can you. :)

      Delete
    2. You never cease to amaze me Just Me. You are a beacon of light to us all in the depth of darkness and despair. God Bless You!

      Anon123

      Delete
    3. i second Anonymous Apr 25 3:40 pm
      Just Me,
      Even after closure of your case, the guidance you are providing to minnows, it is as if you took this avatar to address the inequities and
      the imbecility of this OVDI program. Only if a small majority of the lawyers are as educated and one tenth as good as you are, a good many minnows will sleep well.
      I only wish i had read about your case and story before jumping in. It is buyer remorse.
      My guess is if you knew, what you know now, you would also not have participated.

      Delete
  29. Dear Congressmen:

    1) Abolish Citizenship based taxation.

    If this is not possible then either:

    a)
    End FBAR filing obiligations and penalties for "US persons" that have a bonafide foreign residence and are paying taxes to the country of their redidence.

    b)
    Get rid of FABR's 'cause we now have form 8938!

    ReplyDelete
  30. Dear Congressmen and IRS,

    I implore you to change the rules of the OVDP program, which was obviously designed to attract tax evaders. A lot of middle class people (immigrants and US expatriates) find themselves non compliant by lack of knowledge (most tax preparers in the US won't even ask you the question whether you have a foreign account!). Most of us don't have these foreign account for tax evasions, but because we either already had them prior to moving to the US, or opened it because we lived in that foreign country.

    We would like to make it right and pay what we owe, but the OVDP program is just not appropriate. For people who don't owe much in back taxes, and don't have a huge amount of money in their foreign account, the cost of the OVDP program could bring them to bankruptcy. The entry cost into the program is in the order of $20,000, in lawyer costs and CPAs to amend 8 years of taxes. And the inlieu of penalty of even 12.5% is a tremendous expense, for middle class families.
    Finding ourselves non compliant and facing these humongous penalties is extremely stressfull, and make us leave in fear. Fear that IRS agents might come knock on doors. Fear that we might face criminal penalties and possibly go to jail or be deported for failure to file a document that we did not know we had to do. Fear of being bankrupt and not be able to support our families.
    I am sure the founders of this country would not have wanted that. Fear of the government for a minor mistake is not right in a country like the United States.
    I implore you to fix this program that instigates fear in so many of us.

    Thank you.

    ReplyDelete
    Replies
    1. Thank you. I hope someone will listen, will care, and will act to ease your and others pain.

      Jack Townsend

      Delete
  31. Dear Congressmen and IRS agents,

    On behalf of Permanent Residents and other immigrants in the US.

    By treating immigrants with the same hand that you treat the real tax evaders you are only hurting your objectives of increased compliance. Every case that is treated unfairly will surely post their results on websites such as this and serve as a deterrent to anyone considering OVDI 2012. I think much damage has already been done. Better to give those people that come forward with no bad facts a REAL amnesty.

    A real amnesty would be to let us catch up on any taxes that are owed. Assert a penalty in relation to undeclared income only. NO FBAR penalties if the source funds in the accounts are from legitimately taxed US or non-US origins. I support the 53% of undeclared income penalty argument given above with one exception, PFIC's fake income should be excluded.

    Just having an account in an offshore tax haven is not a bad fact in its self, they are the ones that can offer financial products to US immigrants. Please consider that immigrants with legitimate foreign accounts may be forced to go offshore from their native country because the local banks are very reluctant to offer financial products to US persons.

    There are many legitimate reasons why an immigrant can hold foreign accounts if they had employment in their home country and/or have received inheritances/ gifts. Why should the US government be entitled to 25% of this because we failed to fill in the correct forms and owe a little bit of tax on the interest income.

    The US dollar exchange rate has fluctuated tremendously over the OVDI period and that also goes against the tax payer. My OVDI penalty within the program will be more than 50% of the current value of foreign accounts due to the exchange rate changes and the stock market losses. Add to that the lawyers fees and there will not be much left.

    You have created a shark pool of attorneys for minnows the pass through before they even get to the OVDI nets designed for wales. I have fallen victim to a shark. So far I have spent $15k on attorneys and CPA fees just to submit the OVDI package, and I am not sure if he did it right. I plan to Opt-out but the prospect of the continued outrageous legal fees seems so unfair given my situation. I am damned if I do and damned if I don't. Even if there was no FBAR penalty the legal fees are unfair. I consulted three attorneys before making a decision to enter OVDI and they all used criminal prosecution scare mongering tactics to get me to enter the program, when that was not the right choice for me to make.

    Failure to understand the complex US tax laws in this area is certainly an easy thing to do, and very poorly understood by professionals and tax payers alike. This is not a crime yet I am made to feel like a criminal. My health and my family life are suffering. I don't even have a job or business that would give me enough income to hide. I am a mother and wife and that is it.

    Please provide a fair, simple, and clear way out for immigrants that does not require huge expenditure on legal fees.

    If anyone asks me about moving here I would tell them not to come. The American dream has turned into an American nightmare.

    ReplyDelete
  32. The FBAR/FATCA Task Force of the American Democrats Abroad has been asked to participate in an IRS hearing being held on May 15 in Washington DC in relation to FBAR and FATCA issues, and is asking for our stories. They have a link to a survey to take.

    http://blogs.angloinfo.com/us-tax/2012/05/05/fbarfatca-relief-effort-let-your-voice-be-heard/

    Please take a moment to take the survey an tell your stories. This may be a way to be heard.

    Thanks

    ReplyDelete
  33. I am an immigrant to this country who now goes out of her way to discourage others from coming here.

    The IRS threats and penalties scared me so bad and I wanted to do the right thing by coming forward even though I have only a small amount of interest earned abroad which was mistakenly not declared.

    I feel the FBAR and the IRS penalties specifically target immigrants. They arrive here and OBVIOUSLY maintain financial ties (accounts, land, parents) in their other country. If the immigrant is in the USA one year, has accounts & assets in the home country, and fails to file Schedule B or FBARs due to a lack of knowledge…they are deemed tax evaders and subject to big penalties. The FBAR is anti-immigrant.

    For immigrants who came here and are otherwise tax compliant and show no signs of criminal intent, a written warning along with back taxes, accuracy penalties, and interest should be imposed. Nothing more…otherwise people will leave or simply not comply.

    ReplyDelete
    Replies
    1. You are absolutely right. I'm going to do exactly what you are saying. Be compliant going forward. And if they come after me, go back. As such we already bear so much issues including uncertainty for being in visa, and now this uncertainty. Let them chase me in my home country for 3K of taxes which i owe to them for past 10 years since I did not know. I want to correct this based on light of recent knowledge but 27.5% is not something I can agree to. May be 10% is still do-able as I can earn that money in 8 months but 27.5, my God, will need guaranteed stay in US for 3 years just to recover this in lieu penalty unless employer doubles the salary. This makes me wish that I should have involved myself in all kinds of frauds etc and should have made lot of money and then just pay this 27.5% and come clean. Why I stayed honest and just earned hard salary if punishment is same for both kinds. One checkbox hidden somewhere in some optional form and this is what is imposed. I wish the President had intervened to implement some fairness.

      Delete
  34. AnonymouslyFoolishMay 18, 2012 at 12:50 PM

    I agree with you completely. Have been in the USA for 12 years and still stuck in the work visa status. Leaving behind our old accounts and opening new ones to send money to family members is now considered to be a "tax evasion" activity. Does the IRS have no clue how to differentiate between a willful tax evader who hides money offshore in accounts under someone else's name and an honest immigrant who sends taxed money through legal channels and then pays taxes to the native country where the accounts are held and earn interest? If one wanted to evade taxes, there could have been a million other ways to do it other than openly and legally sending money and paying taxes on top of it!! 

    ReplyDelete
  35. AnonymouslyFoolishMay 18, 2012 at 12:54 PM

    This is exactly what my family back home told me. They said "it almost feels like the US govt. does not want immgrants to live there and are harassing honest, innocent people to make them go back".  Strange and sad, how almost all are beginning to think along these lines and that too about a country that was founded by immigrants.

    ReplyDelete
  36. The OVDI program was created explicitly to deal with UBS clients who had purposely used foreign accounts to evade taxes, typically by creating a sham entity to which they sent untaxed income or phony deductions. There were approximately 3,000 such cases. Another 30,000 people, most of whom had relatively good facts (typically they had created the account for legitimate reasons and funded it with after-tax money but had simply not paid tax on the relatively small amount of interest paid on the account) wanted to make things right (even though they faced little chance of detection) and did so through OVDI which was the only method sanctioned by the IRS.

    The latter group is now facing the threat of the same penalty structure for nonwillful conduct which they voluntarily tried to remedy.

    To put it in numbers, someone who created a $500,000 phony deduction and sent it offshore faces a penalty of 27.5% of the principal, or $137,500 in addition to taxes owed. Someone else, who may have sold a house they owed prior to immigrating, or which they inherited from their parents who live abroad, and who may have earned a few thousand dollars interest on the account, which they did not report, faces the same $137,500 penalty which may be ten times or fifty times the amount of unreported income.

    What is a good deal for those who willfully evaded taxes is a terrible deal for those who simply failed to report foreign interest, often because they were not aware that it faced taxation in the US.

    The way to fix the program is to have a sliding scale based on income, not principal.

    ReplyDelete
  37. Jack, you need not print this comment, but have you considered printing out and mailing these comments to the Tax Advocate and/or Congressmen? It may get more attention that way, especially if sent by an attorney working in this field. I know this is a lot of work for you, so it's just a suggestion. In any case thank you for providing both this opportunity to comment and the blog so we can learn about how to deal with OVDI.

    ReplyDelete
  38. I have been told from a reliable source that some within the IRS regularly read the blog and it is has its influence. Can't speak personally to that, but I think it is true that there are regular IRS readers. I don't know about the Taxpayer Advocate or Congress. I have no plans at the present time to print them out and send them in. I think that, if they are interested, they will work their way to the blog and the comments.

    Jack

    ReplyDelete
  39. The opt out is the safety valve for those who are not willful, at least I think that is the IRS imagination for making the process more fair. However, the uncertainty involved creates a lot of unnecessary angst.

    Jack Townsend

    ReplyDelete
  40. It bothers me that IRS press releases use words such as "hiding" "concealing" and "evading." No doubt that these words are appropriate for some of the worst cases that have been litigated, but in a large portion of cases (I would guess the majority of the voluntary disclosures) there is little or no intent or effort to do any of these things, simply people not being aware of requirements.


    For example, before form 8938 came out this year, anyone who was aware of the existence of the FBAR form, and who had studied it carefully, would have read that individual bonds or notes directly held are NOT reportable. Thus someone with even a scintilla of knowledge of the reporting requirements (and associated penalties) could have simply held bonds and notes directly, thus legally eliminating all FBAR requirements and associated penalties and being subject only to penalty on unpaid income taxes. Or the taxes could have been reported while legally keeping the funds abroad.


    Moreover the 33,000 voluntary disclosures are likely a drop in the bucket as far as accounts that should be reported, and those who make the biggest effort to rectify the past and "get back in the fold" are being hit with the biggest penalties and legal/accounting fees.


    I think a distinction needs to be made between those who established a foreign entity to conceal untaxed income or have other indicators of willfulness, and those who merely failed to report interest income.

    ReplyDelete
  41. I believe that one should be penalized only for "huge undisclosed
    amounts" in countries where they were not born or they have never lived
    before. Accounts in country of birth or residency should be exempt -
    This would spare the Americans abroad and the new immigrants from
    penalties and would only net the TRUE tax dodgers.

    ReplyDelete
  42. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the retuns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants. I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.

    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe thjat if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  43. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the retuns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants. I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.

    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe thjat if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  44. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the retuns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants. I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.

    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe thjat if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  45. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the retuns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants. I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.

    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe thjat if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  46. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the returns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants. I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.

    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe thjat if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  47. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the returns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants.

    I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.



    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe that if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  48. Most of those who joined OVDI were NOT UBS customers at risk of imminent disclosure of their accounts (those for whom the program was created.) Most of us did not create entities or try to hide funds; we simply failed to report interest income and file the FBAR, and the punishment should be commensurate with the offense.

    Yet we are being threatened with FBAR fines of 27.5% of the high balance, which is out of proportion to the unreported interest income. And given the possibility of such huge penalties we are paying for lawyers and accountants to help us come into compliance.

    I have been quoted $25,000 legal fees plus $25,000 accounting fees. Not sure what the fees will ultimately be since it is still early in the OVDI process for me. I am paying this because of the risk of having to pay an FBAR penalty based on my high balance, not on my unreported income.

    If you had a program where you based the penalty on the unreported income, it would be more fair. I would have been better off paying 100% of the total offshore income for the past 8 years, if I could amend the returns myself and do the disclosure myself, instead of paying a total of $50,000 to lawyers and accountants.

    I would have gladly paid that 50K to the IRS not lawyers/accountants if I were not at risk of a 27.5% of high balance penalty.

    It takes as much time for a CPA to amend a return with a small amount of unreported income as one where the amounts are ten times as big; all he's doing in the second case is having an extra zero at the end of the income figures.



    Many, probably most of us are not tax cheats; we're trying to fix past nonreporting. Most of us are not UBS or HSBC-India customers, and are not at risk of having our accounts disclosed to the IRS. Yet we are voluntarily making a disclosure.

    I believe that if you streamlined the process and did not threaten huge penalties with no relation to unreported income, a lot more people would come forward and get back in the fold, and that would be a good thing. Please consider my suggestion.

    ReplyDelete
  49. The OVDI was created to avoid having the IRS use a lot of resources to audit 3,000 UBS customers. A penalty of 20% of high balance was a sweet deal to someone who had created a sham entity in order to hide money.

    As a result of publicity given to the FBAR (something even few accountants knew about) 30,000 people learned that they had been noncompliant and joined OVDI. Most of these did not create sham entities or hide money abroad. They simply had savings there prior to immigrating, or inherited money from foreign family, or sent money to help their parents overseas. They had not paid US taxes on interest earned on the money (but often had paid foreign taxes) and were not out to cheat the IRS; they simply didn't know, and once they found out, they decided to do the right thing and fix their past noncompliance.

    The IRS is now trying to extract the same penalties (actually higher, now 27.5%) based on high balance, and not based on the much smaller unreported interest. It appears that most of those 30,000 in the second group have facts that suggest that they should opt out. Some won't because they've been intimidated by the fear of possibly having to pay huge penalties. But most should.

    Word that those who simply did not report foreign interest may face the same penalties as intentional tax cheats has scared people away from the program. Apparently 300,000 have opted for quiet disclosure or forward compliance (based on the jump in FBAR filings.) Most of those in this group will not pay 8 years of back taxes (often either 3 years or zero years) and no FBAR penalty. Why? Because the IRS does not have the resources to audit even a tiny fraction of 300,000 quiet disclosures.

    The IRS could have avoided this problem completely and would have received more revenue and brought more taxpayers back into compliance simply by setting a ceiling on FBAR penalties as a percentage of UNPAID TAXES. This would have treated people proportionately to tax loss created by the person's conduct.

    There is still time to fix this, if the IRS acts.

    ReplyDelete
  50. We are in the OVDI 2011. Got a new letter asking for 2008 taxes due, based on the 2008 ammended return. We had received similar notice in July 2012 also. That time, I had called the Austin telephone, they said the will assign an agent in 1 month and they will take care of the 2008 taxes due notice. Has this happening to others?? Very stressful and depressing to say the least!

    ReplyDelete
  51. ATTENTION!





    On November 8-9, a seminar will be held in New York entitled
    International Tax Enforcement. See http://meetings.abanet.org/meeting/tax/ITE12/media/ITE12-brochure.pdf







    At the seminar, Nina Olson will chair a seminar entitled,
    "Perspectives on International Tax Enforcement from the U.S. Taxpayer
    Advocate Service and Its Foreign Counterparts."









    One of Ms. Olson's speakers will be J. Paul Dubé, Taxpayers’
    Ombudsman, Office of the Taxpayers’ Ombudsman, Ottawa, Canada. Mr. Dube can be reached at Telephone
    1-866-586-3839; Facsimile 1-866-586-3855; E-mail:
    JPaul.Dube@oto-boc.gc.ca







    If you are Canadian, please contact Mr. Dube and tell him
    about your experiences with the IRS and its draconian disclosure policies,
    penalties, etc. If you are not
    Canadian, contact him anyway and tell him about your experiences. What
    harm can it do?









    Thank you and keep fighting.

    ReplyDelete
  52. Where did you read that there are 300,000 quiet disclosures. Can you provide the link.

    ReplyDelete
  53. By now you have to learn to stay calm to IRS mistakes & inefficiencies.. But IRS will not tolerate your genuine foreign account and will charge you draconinon penalty & threaten you to stay in the program & sqeeze 27.5% penalty from you.

    ReplyDelete
  54. I think somebody should print & fax the content of this post's 70 comments to Mr. Dube & Ms. Nina Olson

    ReplyDelete
  55. Good idea. Let's get a few people to do it. Thanks.

    ReplyDelete
  56. YES! They said I owed money. Wrong. They misapplied the checks I sent. Oversight on their part. They corrected it with a call to the number indicated. Took about 40 mins. to get someone on the line.

    ReplyDelete
  57. I have read that there has been an increase in FBAR reports of over 300,000 additional ones. Since there have been only 33,000 noisy disclosures, and it is unlikely that these additional 300,000 FBARS simply represent new accounts just opened, it would indicate that most of the additional FBARs represent quiet disclosures.
    Unfortunately I do not have a link for the increase in FBARs filed; I thought I had seen it on the IRS website but am not sure.

    ReplyDelete
  58. I was notified by my OVDI agent that for the 1040x form, "only items related to OVDI are considered" and they would not allowed me to claim tax deductible amount that I forgot to deducted in the original return for the closing year! Is this OVDI 2011 rule? Or it is just my agent's understanding? The 2012 OVDI Q&A clearly say if there is any other error, you should included it with the OVDI. Why my error for not claim my tax deductible in the original tax return are not allowed? This is so unfair!!

    ReplyDelete
  59. http://feelgoodtime.net/forum/ - FeelGoodTime.net Health Forum!

    ReplyDelete
  60. According to an article on the front page of the January 23, 2013 Wall Street Journal "Firms Keep Stockpiles of 'Foreign' Cash In U.S." the nation's biggest companies can have their foreign subsidiaries earn profits which are not taxed by the US as long as the profits are not brought to the US (if a foreign subsidiary owns a US bank account, the US does not tax those profits.) Link: http://online.wsj.com/article/SB10001424127887323301104578255663224471212.html?KEYWORDS=firms+stockpile

    It seems rather inconsistent and unfair for people who because of foreign residency or family ties own accounts whose principal has already been taxed but failed to fill out an obscure form to face the costs and penalties of OVDP after voluntarily trying to correct past oversights, while the law as it applies to corporations makes their activities perfectly legal.

    ReplyDelete
  61. Finally, the GAO report on the 2009 OVDP has some data which indicated that a large number of those who joined had tax-compliant principal and only the earnings had not been taxed. It also shows how disproportionate the FBAR penalty has been.

    Link: http://www.gao.gov/assets/660/653369.pdf

    Table 2 divides participants into categories based on account size. For the 10th percentile group, with median account size of $78,315 the total unpaid taxes over the six-year 2003-2008 lookback period were $103 (or $17 per year.) It would be hard to imagine anyone wilfully setting up and maintaining a foreign account to cheat for such an insignificant amount of money, yet the average FBAR penalty for this group was $13,320 or 133 times the amount of unpaid tax. Had this been unreported domestic income the fraud penalty would have been 75% of $103, or $77.

    If unpaid taxes were $107 and one assumes a 33% tax rate, this means that there was $321 of unreported income, which would mean that the account principal raised no tax issues and only the account earnings had escaped taxation.

    And let us not forget that these people had to spend time and money amending six years of returns, and perhaps even spent money on legal fees.

    A $13,320 FBAR penalty in a case with $107 in previously unpaid taxes is grossly disproportionate in such cases.

    For larger accounts the penalty is also disproportionate.

    The 25th percentile group with a high balance of $190,365 had $1,661 total unpaid taxes over six years yet paid a penalty of $35,670. Again, the $1,661 in unpaid taxes translates into unreported income of about $5,000 over six years, or less than $1,000/year which again suggests that the entire principal was tax compliant and only earnings had escaped taxation.

    The median account had a high balance of $568K but unpaid taxes of $12,748. This implies untaxed income of $38K over the six years, or $6,300/year. That's about 1.1% of the principal per year, which again suggests that in most cases there was some interest income but the principal raised no tax issues. The penalty for this group was $107,949, more than eight times the previously unpaid taxes.

    The 75th percentile had a high balance of $1,595,805, and owed $60,449 in taxes over the six years. That's about $10,100 in taxes per year, which implies $30,300 untaxed income per year. This is just under 2% per year, so it is reasonable that most of these accounts were earning and average of just under 2% interest, but the principal was tax compliant. The OVDP penalty of 310,476 is more than five times previously unpaid taxes.

    The 90th percentile, those with the largest accounts, had a high balance of $4,054,505. Total additional tax owed for the six years was $190,399 or around $32,000/year, which would mean untaxed income of $96,000/year. This is less than 2.5% of the principal per year. This is an average, and it is likely that in some cases the unpaid tax pertains to untaxed principal but it would seem that in most cases it was only account earnings that had previously not been taxed. For this group the OVDP penalty was $793,166 or more than four times previously unpaid taxes.


    Even in the largest cases the OVDP penalty seems disproportionately large as it is far greater than would be assessed in cases of domestic fraud. It also appears that except for a minority of the largest account holders, it was only account earnings that had been unreported. The OVDP penalty is in addition to back taxes, accuracy related penalty on the back taxes, and interest thereon which OVDP participants have also paid.


    The later programs, with 25% and 27.5% penalties seem to have attracted smaller accounts with relatively more innocuous facts, so the penalties in such programs are even more disproportionate to past nonfiling of the FBAR.

    ReplyDelete
  62. Anonymous,

    I like your analysis. Would you consider incorporating it into a guest blog that I would post on this blog? I would have to know who you are, but I would be glad to post it anonymously if that is your wish.

    Please let me know at jack@tjtaxlaw.com.

    Thanks,

    Jack

    ReplyDelete
  63. I'd be delighted. Will let you know (and tell you who I am) by email also. Give me a couple of days to refine the numbers using a calculator so I have some precision (the numbers in the blog post were done in my head.)

    ReplyDelete
  64. Thanks for your more in depth analysis. I have also put up my quick analysis here...

    http://federaltaxcrimes.blogspot.com/2013/04/more-on-gao-report-on-irs-offshore.html



    I assume you are the anonymous that was also making comments there. Thanks for digging in more. The GAO leaves out a lot, like the number of participants per percentile. That would also give a better indication of what was happening. The bottomline disproportional penalties does stand out without it, however.


    Thanks again for your efforts

    ReplyDelete
  65. The optout process entails a high degree of uncertainty. According to lawyers I've spoken with, the process seems to be a "black box" with high unpredictability as o how the various facts of a particular case are considered. Furthermore a lot seems to depend on the personal judgement of whatever agent is assigned to handle the case. Moreover, the decision to opt out is irrevocable.

    Why, after spending tens of thousands in accounting and legal fees to prepare a submission, are we not entitled to a review of individual facts within the OVDI program? After all, on the income tax side, it is quite clear which deductions are allowable and one can determine whether it is better to take the standard deduction or itemize. Why should those with relatively good facts pay the same 27.5% of highest balance as those who had really bad facts? Why must we take a risk of maybe being told we owe 300% of high balance?

    ReplyDelete
  66. We are stuck. We have no money to pay for an OVDI. We are
    Swiss nationals but resident aliens.

    The "guy" in our Florida town preparing our income taxes always asked us
    if we had any income or interest to declare and we have always declared all
    income. We told him that we had some Swiss inheritance money we received in
    2008 in Switzerland, but he told us not to declare it, because the IRS do not
    tax foreign inheritances, They will only tax any interest or income derived
    from that inheritance. The Swiss bank holding that inheritance money has lost
    up to 16% of the initial capital anyway in bad investments. The sad thing, is
    that we have been bringing in money from Switzerland since we have been
    residing here in the USA (to pay for the bills). We opened a small business,
    employed "real" Americans, and now in 2014 the business has failed so
    we have very little money to get back on our feet. To make matters worse this
    FBAR thing has descended out of nowhere like a UFO. We understand that some
    Americans have been trying to hide their wealth and income in Switzerland and
    they should be punished appropriately for evading, but not us Swiss citizens
    who brought in money and did the opposite. I do imagine that immigrants in the
    following years (once many lives have been destroyed) will retaliate so as to
    change some laws! Or are we going to stay passive? Like the Jews in
    concentration camps. I bet you, had the IRS sent an FBAR filing requirement to
    all resident aliens that we would not be in this mess. Immigrants are in
    unchartered territory here, it can take years to “understand” the American way
    of life before we can even start to “fit in”. Arriving here and settling in
    takes a while, our main concern was to find a school for our children, buy a
    home and cars, opening a business later on. Learning how to fill in a tax
    return has never been one of our priorities because there are accountants who
    do this for us and are supposed to know what to do.

    We remember distinctly that one of the criteria for
    obtaining a green card is that we had to be properly funded before entering the
    U.S. We showed the authorities our Swiss account balances and the name of the
    bank a first time back then. Every year that our business was open we always
    showed income, expenses, and also our own money we put into the business so as
    to compensate between these.

    Looking back on our filed tax returns these past years
    (something we would never had done had this FUBAR thing not suddenly come
    about), we discovered that 2 other small Swiss accounts had been declared,
    because there was some interest earned. Simply this other inheritance account
    that never accrued any interest nor income was never declared as an FBAR. Pointless
    to go threaten our accountant now for having mislead us not to declare it
    because it was non-taxable inheritance money. What do do? We can’t Join OVDI.
    Even if we did, we do not have 27.5% of the original amount to pay as a fine.
    Should we do a quiet disclosure and hope for the best? Could also go crawling
    back to Switzerland out of the first hole we were in.

    ReplyDelete
  67. Michael J. MillerJune 8, 2014 at 9:09 AM

    Anonymous, I'm reading quickly as I have a 7-year old climbing on me, but if I understand correctly you've reported ALL of your income from the foreign accounts and the ONLY thing you've failed to do is file the FBAR and report the receipt of your foreign inheritance (on Form 3520). If I'm correct, then certain guidance on the OVDP (FAQs 17, and 18) would allow you to file the past due forms now without penalty. Apologies if my quick read has failed to grasp all the pertinent facts.

    ReplyDelete

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