Wednesday, June 27, 2012

National Taxpayer Advocate Report to Congress (6/27/12)

The IRS has published the National Taxpayer Advocate Report to Congress (6/30/12), here.  Here are some excepts related to the NTA's issues with the IRS Offshore Voluntary Compliance initiatives (Report pp. 26 -29 (footnotes omitted)):
G.  TAS Will Continue to Advocate that the IRS Modify the Offshore Voluntary Disclosure Program so that People Who Made Honest Mistakes Can Correct them Without Fear of Excessive Penalties 
In the past few years, the IRS actively promoted the 2009 Offshore Voluntary Disclosure Program (OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (OVDI) . These initiatives allowed people who failed to file a Form TD F 90—22 .1, Report of Foreign Bank  and Financial Accounts (FBAR), reporting foreign accounts and the income from those accounts to settle with the IRS by paying a single “offshore” penalty instead of several other penalties that the IRS might seek to apply, including severe civil and criminal penalties designed for willful violators.  However, these initiatives were not promulgated through issuance of published guidance in the Internal Revenue Bulletin or even in the Internal Revenue Manual (IRM) .  Instead, the IRS published and then often updated and revised the terms of these initiatives on its website.   In the 2011 Annual Report to Congress, the National Taxpayer Advocate discussed her concerns about the “bait and switch” approach the IRS took in administering the 2009 OVDP and recommended several actions to restore IRS’s credibility among taxpayers and practitioners and promote fair tax administration based on the generally accepted concepts of due process, transparency, and procedural fairness.
Specifically, the IRS announced that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes,” prompting those whose violations were not willful to enter the program.  On March 1, 2011, more than a year after the 2009 OVDP ended, the IRS issued a memo suggesting it would no longer consider whether a taxpayer would pay less under existing statutes .  Those with inadvertent violations could either agree to pay more than they should or “opt  out .”  Given the confusion surrounding what penalty would apply outside of the program, many agreed to the offshore penalty.  Continuing concern that the IRS may apply excessive penalties for inadvertent violations has generated public outrage among those with foreign accounts, such as U .S . citizens living in Canada. 
The National Taxpayer Advocate also issued a Taxpayer Advocate Directive (TAD) recommending that the IRS take steps to address her concerns .  The Small Business/SelfEmployed and Large Business and International Divisions appealed the TAD to the Deputy Commissioner for Services and Enforcement, who modified it without providing a satisfactory explanation or rationale.  Following the Deputy Commissioner’s memo, the National Taxpayer Advocate elevated her concerns to the Commissioner of Internal Revenue for a formal response.  The Commissioner has not provided a formal written response.  However, the National Taxpayer Advocate has personally discussed her concerns and recommendations with the Commissioner.   
TAS has also continued to assist taxpayers by issuing Taxpayer Assistance Orders (TAOs) when the IRS has failed to follow its public guidance with respect to the 2009 OVDP or 2011 OVDI.   In response to one such TAO, the SB/SE Commissioner recently challenged the National Taxpayer Advocate’s authority to issue a TAO that directed the IRS to follow its procedures, review its determination at a higher level, and reconsider facts that it seemed to have overlooked. 
While the Deputy Commissioner may modify or rescind a TAO, the scope of what a TAO may direct is necessarily broad.  A TAO may order the IRS to “cease any action, take any action as permitted by law, or refrain from taking any action, with respect to the taxpayer” under enumerated chapters of the IRC dealing with collection or bankruptcy, or “any other provision of law which is specifically described by the National Taxpayer Advocate in such order.”  Accordingly, a properly constructed TAO can order the IRS to take “ANY” action. However, the IRS may not always be willing and able to comply — and because of the TAO appeal process, the IRS retains the final decision-making authority.   
Because the IRS retains the authority (and duty) to make substantive determinations, a TAO will only prompt the IRS to take actions that it is legally permitted to take based on its own determinations (not TAS’).  For example, a TAO could not actually cause the IRS to change a tax assessment unless the IRS determined the change was legally permissible based on its own factual and legal determinations.  In this way, TAS avoids becoming a second Appeals function. 
The SB/SE Commissioner argued that the National Taxpayer Advocate had no authority to issue the TAO (described above) because guidance posted to the IRS website indicated that if a taxpayer disagreed with the IRS’s determination, his or her only option was to “opt out” of the settlement initiative.  Thus, he reasoned, TAS could not issue a TAO requiring the IRS to reconsider its decision at a higher level or to consider facts that it appeared to have overlooked. 
The National Taxpayer Advocate finds this reasoning flawed.  Some IRS procedures allow taxpayers to appeal the determination to Appeals or to Tax Court, but none expressly authorize taxpayers to seek TAS assistance if they disagree.  As the Treasury Regulations explain, a TAO is “not intended to be a substitute for an established administrative or judicial review procedure, but rather is intended to supplement existing procedures .  In this case, the TAO is not seeking special relief outside of the established process.  Instead, it seeks exactly what the regulations contemplate — a supplement to the existing procedures by having the IRS review at a higher level its preliminary determination under an established administrative procedure (OVDP).  The fact that other administrative or judicial procedures might be available to the taxpayer in the future, i.e ., opting out, is of no consequence at this time . Based on the posture of the case, i.e., a TAO seeking review at a higher level, the current administrative procedure (OVDP) is appropriate.  If the taxpayer later opted out and the IRS conducted a full examination, TAS could issue a TAO at that time elevating consideration of that administrative procedure, the examination . 
Accordingly, if the IRS could so restrict National Taxpayer Advocate’s statutory authority to issue a TAO, it could prevent TAS from assisting taxpayers in any IRS process by simply issuing a statement on a website.  The National Taxpayer Advocate strongly disagrees with the SB/SE Commissioner’s interpretation of her statutory authority and will seek to address it in FY 2013, including acting in accordance with her office’s understanding of the National Taxpayer Advocate’s statutory authority. 
In addition, the National Taxpayer Advocate is looking forward to meaningful TAS participation in developing procedures for the new Offshore Voluntary Disclosure Program the IRS announced on January 9, 2012. TAS believes any such procedures should be published in the IRM or the IRB as formal guidance upon which taxpayers can rely. As described above, the National Taxpayer Advocate has provided specific recommendations about the general principles of how the formal guidance should be drafted as well as how to treat different categories of taxpayers . The amount of the penalty (or relief from penalty) would depend on the taxpayer’s category, with a broad anti-abuse rule. 
In FY 2013, TAS will also continue advocating for taxpayers who were harmed by the IRS’s refusal to consider whether a taxpayer would qualify for less penalties under existing statutes according to FAQ#35 of the 2009 OVDP.
Readers might also want to review the section beginning on p. 21 titled F. TAS Will Continue Advocating for American Taxpayers Abroad Who Are Expressing Fear and Frustration about FBAR, FATCA and Other International Penalties 


  1.  Jack

    Another important comment by the NTA in the report:

    We encourage the IRS to adopt a threshold set forth in IRC § 6662(d) (i .e ., the greater of ten percent of the tax required to be shown on the return for the taxable year or $5,000 for individuals) .  This exception should apply to both residents and nonresidents .  These taxpayers should file amended returns, pay the tax due, interest, and in the absence of reasonable cause, accuracy-related penalties, but the IRS
    should not impose any FBAR or information reporting penalties .

    I would say, hooray. I don't see that being adopted, though.

  2. is this $5,000 taxable income or tax ?  the new procedure has $1500 tax per year as "low non-compliance risk" for US expats.

  3.  neither. The $5000 is the suggested fine.

  4. I read this rather differently, this is in

    (c) NegligenceFor purposes of this section, the term “negligence” includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.(d) Substantial understatement of income tax(1) Substantial understatement(A) In generalFor purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of—(i) 10 percent of the tax required to be shown on the return for the taxable year, or(ii) $5,000.So this $5000 is omitted income.  

  5.  ij,
    The greater of 10% or $5,000 is on the "income tax" and not just "income". The title of that section is "
    Substantial understatement of income tax". The text also is referring to the amount of "income tax" and not just "income."

    Clearly, the TAS is referring to the existing IRM procedures and advocating that the IRS stick to the established guidelines instead of coming up with new numbers for just OVDP/OVDI.

  6.  Anon3419, thanks...   $5000 income tax for a year is a huge number.  
    Obviously IRS is using FBAR to punish non-compliance.   

  7. The reference in the TAS report is to tax due in a year.  This threshold is used to trigger a 6 year SOL for tax returns by the statute, and the TAS must have considered that to be a reasonable threshold for applying FBAR penalties.

    However, this is purely a strong recommendation from the TAS. The IRS has not accepted such a recommendation.

    But I wonder if the TAS is sending a strong dual message to the IRS (and to minnows seeking assistance) -- if you have reasonably good facts, a penalty beyond the TAS recommendations may be too harsh.

    1) The message to the IRS then is 'Don't go too far beyond the TAS recommendations '
    2) The message to minnows is -- if the IRS goes beyond the TAS recommendations, and refuses to be reasonable, consider requesting the TAS for assistance.

    Too much tea leaf reading on my part, maybe. But maybe not.

  8. I am trying to parse some of the disputes over the NTA's authority and the IRS's challenges to it, and what sort of implication this has for minnows seeking opt out or go forward audit.  A lot of the dispute seems to be over administrative procedure and authority. So, what I am wondering is

    1) For a minnow opting out, when is an appropriate time to contact the TAS ? Before opt out ? After opt out, but before going to Appeals ? After Appeals ?
    2) The NTA has broad authority, but a lot of it pertains to the IRS's administration of the Internal Revenue laws. Unless serious economic harm is shown or imminent, can the TAS help with an FBAR penalty ? I think so, because I think the TAS can intervene if the IRS is not following procedures properly and FBAR procedures are present in the IRM.

    I hope the NTA escalates some of her disputes to Congress. Congress may be busy in an election season and may not care specifically about foreign account holders who rarely vote much (expats/immigrants), but it is sensitive to its prerogatives and to a perception that the IRS is trying to ignore its statutes.

  9. This comment is in the 'additional information' category about the NTA.  Last night I spent an hour or so reading this report on the NTA that was written back on 2010 by someone that Jack might know.  I found it very illuminating for me. 

    Title was: What Good Is the National Taxpayer Advocate? 

    by Bryan Camp of the Texas Tech University School of Law

    Here is the link to the Synopsis and download.

    At 15 pages, it was not that bad of a read, and for me, had some enlighten comments about Nina Olson's role in negotiating a fine line between being seen as an IRS insider, while advocating for Taxpayers as an Outsider.  The author generally was impressed with how well she navigates these conflicting waters. 

  10.  Reading the full text on page 24 in the Tax Advocate's report will eliminate any confusion.  She is suggested that those who understated their tax due by under 10% (for example showed $4.5k due when the actual amount due was $5K or less, OR understated tax due by less than 5k, should not pay any FBAR penalties.  She goes on to list other categories and suggested penalties.

    It says "IRS collects $5 billion from offshore tax cheats"   The total tax cheats in OVDI/OVDP(2011/2009) are 33,000.  

    That means on average, each cheat has paid 151K.   Are they talking about tax evaded or tax plus in lieu penalty ?

    If this 5 billion is tax.  That would make me such a tiny minnow as I would only owe between 2-3K tax.   

    Remember M once said, TAS is right about setting threshold on 5K/year for all taxpayers who  should be exempted from FBAR penalty. 

  12. Ij
    I too have wondered what that $5 billion represents. My guess is this number includes in-lieu FBAR penalties. I have tried researching for the break-up of this amount but so far, haven’t seen any article or IRS news release. 
    To determine the success of these disclosure programs (OVDI and OVDP), it is critical to understand the composition or breakup of the $5B collected so far.  If bulk of the amount is coming from FABR penalties, then, depending on the purpose for which the bank accounts were set up, (illegal income source, or tax avoidance, etc), success or failure can be evaluated. 
    Also, I think some sort of stratification of taxes due per year (tax non-compliance) and comparing it to the corresponding FABR penalties collected might be one good way to determine the success of these programs. For example, # of people (of the 33,000) with tax non- compliance amount $1,500 a year or less (excluding interest on this tax amount or accuracy penalty) and comparing it to corresponding FBAR penalties collected from this sub set of the population will be helpful.  Another category could be tax non-compliance of $5,000 or less a year and corresponding FABR penalties collected.
    If the analysis shows, for example (and making an extreme case here to highlight the point), tax non-compliant category of $1,500 per year contributed to 50% of the $5B, and the next subset of $5,000 or less a year tax non-compliant category contributed to another 30% of this $5B,  then the success of the disclosure programs is pretty obvious – if 80% of the $5billion comes from these two categories of tax non-compliant folks, it is the minnows who are making these programs a resounding success! Now, peeling the onion another layer – what are the chances that these folks with tax non-compliant amounts of $5,000 or less a year were trying to do some serious tax evasion? 
    Our government and the IRS need to be transparent with the American people and provide some meaningful analysis to determine the success of these disclosure programs rather than just the $5B #.  This is an election year and at least US expats here are willing to make changes they believe in. I have talked with several of them and folks are perplexed, stressed and for many, it is a mental torture as their tax non-compliance is mainly due to either lack of knowledge to file or lack of understanding of US tax laws – which are one of the most complicated in the world.  So, this is the state of the Union thus far!
    Immigrants, your turn to be heard will come too – if you decide to take American Citizenship – for what it is worth.

  13. I think her recommendations are a good start, but in the non willful category, it seems there should be guidance in the form of a ceiling on fbar penalty based on unreported income.  For example, someone with 200K would face a 55k OVDP penaly at 27.5% OR either a non willful penalty of 50k or 60K depending on whether 5 or 6 years remain open.  For smaller accoutns there should be guidance, for example that the FBAR penalty will not exceed the same amount as the accuracy related penalty for that year.  This would yield some nuance to the penalty instead of having a one size fits all approach.

  14. If a person has not filed certain supplemental forms (but filed 1040), can the IRS request those for an unlimited period of time. Or does IRS use a sort of unwritten rule that it will usually not pursue those forms after 6 years.  I ask in the context where IRS is pursuing state records for property transfer for less than adequate consideration and has requested records 2005 onwards, and not say 1999 onwards. Does it mean that if the property was transferred in 2003 for example, no delinquent forms are required to be filed and the IRS would not request them if they came to know of it in the future.

    Also, one of the OVDI FAQs stated that if an overseas property was sold more than 8 years ago and gain was not reported, no action is required. Hence wanted to check if there is an unwritten rule not to pursue delinquent forms that are more than 6 years old even though there is unlimited SOL for the forms not filed.

  15. Immigrant in the USJuly 9, 2012 at 11:59 AM

    Immigrant taxes are scrutinized when they apply for citizenship. This means immigrants who became aware of this obligation and want to become citizen will need to fix their past one way or another before applying for citizenship. Most immigrants still ignore the law and never complied. My guess is that the few of them who learned about FBARs, did some research and found out about the issue and the ridiculous cost of becoming compliant will just continue to not disclose their home account and interest on their taxes and not file FBARs. I doubt their banks will report them to the IRS, even when FACTA is in effect. How can the bank in their home country find out they have a green card?
    For the few who decided to file forward, because they wanted to do the right thing or got scared of the penalties, they will either have to do a quiet disclosure, enter OVDI, or wait till the statute of limitation are over on the FBAR before applying for citizenship. Sadly, these honest ones are the ones who are penalized by that. Looking backwards, I wished I had just closed my account instead of panicking and putting me if this situation. So, I don't think we will hear from immigrants about this issue. We don't have representation. Actually, Americans of Indian Descent have tried to talk to the IRS without success on the issue.
    The IRS answer has always been the same: enter OVDI and opt out.
    Sadly, these new procedure don't apply to us because we live in the US. The IRS is aware of the issue and decided not to address it. Why would we be more "guilty" than American expats for not closing an account we had in our home country prior to moving here?
    I want to thank Just Me, who always tries to mention the immigrants issue when commenting or talking to the press.

  16.  " Looking backwards, I wished I had just closed my account instead of panicking and putting me if this situation."
    If misery loves company, you have me for company. I did the same thing and regretting why i jumped in.

    I think a lot of Indian IT professionals who are immigrants or had assets earned in India before moving to US got scared after reading the news about Vaibhav Dahake and the Indian surgeon who got dinged. But those folks had real bad facts.  Some of the Indian CPAs like the one in Chicago and Texas added fuel to the fire and did not help much. I think they also did not know much about the law were carrying water for the service.

    IMO, after reading the blogs a good majority of the IT folks without bad facts should be able to opt out and get a lesser penalty. But you may want to be sure that whatever is saved does not go as lawyer fees. Most of the agents seem reasonable and if a  huge number of IT folks opt out i cannot see how the IRS can take everyone to court to collect the FBAR penalties. Even if they lose a couple of cases, it may embolden others.

  17. Ex-immigrant in the USJuly 9, 2012 at 4:46 PM

    "...they will either have to do a quiet disclosure, enter OVDI, or wait till the statute of limitation are over on the FBAR before applying for citizenship"

    There's a third way of course: simply leave the US and never return.  That's what I did.  I took my job with me too.  I do the same as I did while I lived in the US, but every penny I pay in tax goes to a more appreciative and more deserving country.  I don't pay any less tax than I used to.  But I do feel much, much better that I no longer live in a nation that both permits and condones this type of legalized extortion.  It is unconscionable that immigrants into the US should fear for accounts held from before they arrived.  The only vote immigrants can make is with their feet, so that's what I did.  My major regret is that I did not do so sooner.

    One final thought: waiting for legislative relief or common sense from the IRS is futile.  There is no sign of any improvement on the horizon, merely worsening (Ex-PATRIOT, for example).  You have to save yourself, because nobody else will.

  18.  For many immigrants from poorer countries, it would be cutting off one's nose to spite one's face to leave purely on tbe basis of largely hypothetical penalties. Besides, many have lives in the US (and have families with lives) and do not want to give those up. I exclude those who have serious bad facts and face a realistic threat of jail OR those who have major assets outside the US prior to immigrating here.

    This is not saving oneself, its fleeing chimeras.

  19. I wish it was that simple... I am married to an American and have 2 kids. She's not willing to leave.

  20. Jack,

    I would appreciate your input to the above as my case is similar. in my case, my overseas non-citizen parents bought property in joint name of my father and myself under my power of attornery (POA). A few years later they used the POA to transfer the property to my father (i.e. from joint name to single ownership). 6 years have passed since this happened without me being aware. Would i be held responsible for not filing 3520 when they bought the property in joint name and then 709 when it was transferred back to them. I am confused since in dont want to pay the 25% non filing 3520 penalty and use the gift tax allowance. In case i inherit the property, does IRS ask for the orginal purchase documents.

  21. I am a guarantor to a overseas loan taken by my family. Do i need to file an FBAR?

    What if there is a mortgage loan account but no bank account (such as checking or savings account), does this loan need to be disclosed?

  22. See the below 

    Sec. 301.6501(c)-1 (f) Gifts made after December 31, 1996, not adequately disclosed on the return—(1) In general. If a transfer of property, other than a transfer described in paragraph (e) of this section, is not adequately disclosed on a gift tax return (Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return”), or in a statement attached to the return, filed for the calendar period in which the transfer occurs, then any gift tax imposed by chapter 12 of subtitle B of the Internal Revenue Code on the transfer may be assessed, or a proceeding in court for the collection of the appropriate tax may be begun without assessment, at any time.

    It appears from the reading that ANY gift tax ...on the transfer may be assessed at any time. So if you are within the gift tax exemption limit, you MAY NOT be required to file the gift tax form.  Also as you note in 15 states IRS has asked for records since 2005 and the request was made in 2010. Having said that, I am not a lawyer and hence it might be beneficial to get input from others on this blog on whether IRS will pursue the gift tax issue after 6 years .

  23. TAS comments are helpful I will also add the following: a.        response from US secretary Geithner office by Heather C. Maloy/ Rosemary Sereti at 1-212 719 6258.
    Quote from the response from Heather C. Maloy: “Further, under no circumstances will a taxpayer have to pay a penalty greater than what he or she would otherwise be liable for under the maximum penalties imposed under existing statues. If the offshore penalty is unacceptable to a tax payer, he or she may opt out of the OVDI and request that we refer the case for an examination of all relevant years and issues.”

  24. Any thoughts? Anyone? Same situation.


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