Tax Law Center Blog

By Parag P. Patel, Esq. | Updated March 19, 2012

American Citizens Abroad (ACA) has written to IRS Commissioner Doug Shulman of the IRS to express the organization’s profound concern that he has not answered the Directive issued by National Taxpayer Advocate Nina Olson. In her report to Congress issued on December 31st, 2011, Ms Olson raised concerns about certain IRS practices, including the way Americans living overseas were treated by IRS examiners under the 2009 offshore voluntary disclosure program (OVDP). Commissioner Shulman had until the end of January 2012 to answer Olson’s Directive, but has chosen not to. ACA’s letter calls upon Commissioner Shulman to answer these concerns promptly, as is his statutory duty. In the letter, ACA also asks how many of the reported 33,000 taxpayers who came forward under the OVDP have overseas addresses and how much of the US$ 4.4 billion collected under the program comes from FBAR fines instead of back taxes.

Unfortunately, our law firm expects the letter to fall on deaf ears.  Last year, other organizations wrote similar letters with no impact (other than ceremonial meetings with government officials).  We expect unabated aggressive enforcement of the tax laws, including increased criminal prosecutions and civil audit examinations.  We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets.

Below is the letter:

On March 5th, American Citizens Abroad (ACA), an advocacy group of U.S. citizens living overseas, wrote to Commissioner Doug Shulman of the IRS to express great concern that he has not yet answered the Tax Advocacy Directive (TAD) which National Taxpayer Advocate Nina Olson issued in August 2011 and repeated in her Report to Congress issued December 31st, 2011. Tax Analysts, a non-profit publisher of tax information, has reported that “IRS Commissioner Douglas Shulman has no plans to respond in writing to National Taxpayer Advocate Nina Olson’s taxpayer advocate directive (TAD) on the IRS offshore voluntary disclosure program (OVDP) despite a statutory requirement that taxpayer advocate recommendations be responded to within 90 days, Olson said February 17th.”

In the TAD and in the Report to Congress, NTA Nina Olson argued that IRS examiners treated some participants in the 2009 offshore voluntary disclosure program (OVDP) unfairly, and she ordered several IRS divisions to take various steps to correct this treatment, including allowing taxpayers who had paid penalties under the OVDP to request a reduced penalty. In her report, she even used the term “bait and switch” to describe the change in OVDP policy that the IRS implemented a full two years after rolling out the program.

In a September 22nd, 2011 memorandum after her August TAD, Olson further explained why she instructed the IRS to change certain practices. The subjects of this memorandum include “The IRS harmed taxpayers seeking to correct honest mistakes” and “The IRS retroactively changed the terms of the OVDP” to eliminate the possibility of examiners reducing penalties for overseas filers who had no idea they had to file. The memo further explains that “the OVDP penalty structure assumes all participants are tax evaders hiding money overseas, when in fact, the IRS steered many people into the program who made honest mistakes.”

Many participants in the OVDP program have been Americans living overseas who had no idea they had to make a tax declaration to the United States, which is the only country in the world (besides renegade Eritrea) which taxes on the basis of citizenship instead of residence. In her Memorandum, Olson further wrote of the OVDP, “a more effective initiative would have prompted even more taxpayers to come into compliance without leaving those who did come forward feeling terrified, tricked, or cheated.”

MaryLouise Serrato, Executive Director of ACA and co-signatory of the letter to Shulman, explained, “By imposing large penalties for a simple filing omission, the IRS has adopted a camouflaged policy of taxing assets of Americans abroad through penalties.”

Anne Hornung-Soukup, Finance Director of ACA and the other co-signatory of the letter, said, “Our letter to Commissioner Shulman of the IRS makes it clear that ACA is in full agreement with efforts to find and hold accountable tax evaders. However we also know firsthand from our members how devastating the indiscriminate use of penalties under the OVDP has been for many American citizens living outside of the United States. Most of them are not tax cheats; they were sincerely and completely unaware of the Foreign Bank Account Report (FBAR) filing requirement, since it was not enforced until just a few years ago.”

Hornung-Soukup continued: “Many of the U.S. citizens living abroad who entered the OVDP in fact owed no taxes to the United States, since they had paid full taxes in their country of residence. Yet because of not filing their FBAR forms, they faced IRS imposed fines and penalties amounting in some cases to their entire lifetime savings. Many Americans living overseas are now terrified to regularize their status because they’re afraid of being fined huge amounts, even if they owe no taxes.”

ACA’s letter explained to Shulman that, on the FBAR form, Americans have to declare even accounts over which they have signature, but which they do not own. This is particularly damaging to the many American women who are married to non-Americans and living abroad. They have often never worked outside of the home, and therefore do not owe any taxes. Yet to come into the system by filing the necessary FBARs, they will have to declare their foreign husbands’ accounts to the IRS and be subjected to heavy penalties, something their non-U.S. husbands are understandably reluctant to undergo.

ACA in its letter asked Shulman to respond immediately to the National Taxpayer Advocate, and to take the measures which Olson suggested in her Directive. Furthermore, ACA asked in its letter that all IRS examiners be instructed to take into account the individual circumstances of U.S. citizens abroad who were previously unaware they had to file FBARs and who, due to IRS overkill, are now afraid to come forward.

Hornung-Soukup added, “We also asked Commissioner Shulman, again, two questions which have already been raised in Freedom of Information Act letters sent to the IRS, but which have not been answered. These questions are, how many of the 33,000 taxpayers who came forward in the OVDP live outside of the United States, and how much of the USD$ 4.4 billion that was collected under this program comes from fines, and not back taxes?”

ACA concluded its letter by stating its position that these huge problems for Americans living overseas are essentially due to the U.S. system of citizenship-based taxation. ACA is therefore strongly encouraging Congress to abandon citizenship-based taxation and to adopt residence-based taxation for individuals at the same time they adopt residence-based taxation for corporations.

The full text of the letter and much more information on this issue can be found on the ACA web site at http://www.americansabroad.org

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

Book a Paid Legal Consultation