Tax Law Center Blog

The Taxpayer advocate has issued a new mid-year 2013 report. The portion that relates to the IRS’s OVDI/P initiatives is posted below (footnotes and tables omitted).

The IRS offered a series of offshore voluntary disclosure (OVD) programs to settle with taxpayers who had failed to report offshore income and file one or more related information returns (e.g ., Form TD F 90–22 .1, Report of Foreign Bank and Financial Accounts (FBAR)) .

As described in prior reports, these programs apply a one-size fits-all approach designed for “bad actors” to “benign actors” who inadvertently violated the rules, requiring them to opt-in and then optout, and subjecting them to lengthy examinations and draconian civil and criminal penalties. In addition to criminal penalties, the maximum civil penalty for “willfully” failing to report foreign accounts on an FBAR is severe – the greater of 50 percent of the account or $100,000 per year.

A Government Accountability Office (GAO) analysis shows that the offshore penalty paid by those with the smallest accounts (i.e., those in the 10th percentile with accounts of $78,315) was disproportionate – at least 575 percent of the tax, interest, and penalties on their unreported income.

It was also disproportionately greater than the amount paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4 million) who paid 86 percent or less.

Moreover, the IRS initially processed applications from benign actors who are expected to opt out much more slowly than others, though it has recently begun to process them more quickly.

In 2012, the IRS began allowing certain “low risk,” nonresident nonfilers – those with simple returns and owing less than $1,500 in tax – to file the returns without triggering penalties (the “Streamlined Nonresident Filing Initiative”). In January 2013, following the National Taxpayer Advocate Service’s (TAS) recommendation to expand the Streamlined Nonresident Filing Initiative to both U.S. residents and those owing more than $1,500, IRS officials publicly announced the IRS had eliminated the $1,500 threshold.

Although this is a positive change, the National Taxpayer Advocate remains concerned that the IRS does not have a simple and easy method for allowing benign actors who are U.S. residents to resolve past filing delinquencies. Nor has it provided clear guidance about key terms that it has used in its programs, such as when someone will be considered “high risk,” how they may avoid a penalty (e.g., by demonstrating “reasonable cause”), and when they will be subject to the lower penalty applicable to “nonwillful” conduct . The uncertainty surrounding these terms and the consequences of opting out has likely prompted some benign actors to pay more than they should inside the OVD programs.

In addition, the IRS has reportedly revoked pre-clearance letters authorizing taxpayers to participate in the OVDP, even though some had already made disclosures, filed returns, and paid taxes and penalties in reliance on the IRS’s letters.

These reversals further erode the IRS’s credibility, and are more likely to reduce than to increase voluntary compliance. Moreover, the IRS has not adopted the National Taxpayer Advocate’s recommendation that IRS send notices to educate those with foreign accounts about the requirements. Nor has it addressed the unnecessarily burdensome requirement to report certain accounts on both Form 8938 and the FBAR.

Finally, in FY 2012 and FY 2013 YTD, TAS assisted 474 taxpayers with OVD-related problems and issued four taxpayer assistance orders (TAOs). In the three cases in which the IRS did not comply with the TAOs, the National Taxpayer Advocate elevated (or plans to elevate) them to the Operating Division Commissioner level or above.

In FY 2014, TAS will continue to advocate for taxpayers experiencing problems with the IRS’s OVD programs. In addition, TAS will advocate for the IRS to stop unnecessarily burdening taxpayers who inadvertently failed to report foreign accounts on information returns, and to adopt more reasonable policies that will restore its credibility and be more consistent with its mission to promote voluntary compliance. For example, TAS will continue to advocate for the IRS to expand its Streamlined Program to U.S. residents, to clarify and formalize the terms of its OVD programs by requesting public comments and then publishing guidance in the federal register (rather than a website posting), and revise Forms 8938 and/or TD F 90–22 .1 to reduce taxpayer burden and the duplicative reporting. TAS will report its progress in the National Taxpayer Advocate 2013 Annual Report to Congress.