Foreign Account Penalties Are Unfair

Our office is advising dozens of clients (including many HSBC customers) regarding offshore accounts, all of whom may be subject to large unfair penalties.  Finally it appears that someone in government is realizing the unfairness of the offshore penalties.

In her June 30, 2011 Report to Congress, U.S. Taxpayer Advocate Nina Olson criticizes the IRS over its Offshore Voluntary Disclosure Program. According to its mission statement, the Taxpayer Advocate Service–an independent organization within the IRS–helps taxpayers resolve problems and recommends changes to prevent them.  However, the Taxpayer Advocate cannot and does not create or pass new laws (hence do not expect any significant government action).

Olson points out in its first offshore amnesty program that ended October 15, 2009, the IRS said if you came forward, “under no circumstances” would you pay larger penalties than if you didn’t step forward. Yet on March 1, 2011, more than a year after that first voluntary disclosure program expired, the IRS “clarified” that it would no longer consider whether taxpayers in the 2009 amnesty program would pay less than under existing statutes on based on having reasonable cause or being non-willful.

Taxpayers either had to agree to pay more than they believed they owed or withdraw from the program and face potentially massive civil, and perhaps even criminal, penalties.  The Taxpayer Advocate Olson said this violates  longstanding IRS policy.  It’s not clear how this all applies to the current OVDI program, since opting out still seems somewhat risky.

In spite of the Taxpayer Advocate’s announcement, taxpayers (including many of our clients) with foreign accounts must still participate in the OVDI program and will be subject to large unfair penalties.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.