Wednesday, January 9, 2013

TA Report Identifies IRS' OVDP / OVDI As Problem (1/9/13)

The Taxpayer Advocate has issued her new Report to Congress, here.

In it, she identifies specific problems, among which is:  The IRS’s Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by Those Who Inadvertently Failed to Report Foreign Accounts, here.

Eliezer Mishory, a 2L student at George Washington University Law School, notified me of the Report and provided the following summary (which I may supplement later after I have had time to review in detail):
It may be newsworthy that the OVDP “made it” to Nina Olsen’s Taxpayer Advocate Report to Congress as “Most Serious Problem” number 8. I have only scanned the report but it seems that her chief grievances are (1) that the program treats “benign actors” who had reasonable cause or inadvertently failed to file FBARs the same way as “bad actors”, (2) the difficulty in opting out of the OVDP, and (3) the unnecessary burden on taxpayers caused by the overlap of FBAR and Form 8938. 
The report recommends establishing three (3) categories of taxpayers: 
1) Taxpayers who only underpaid a small amount should be able to come compliant without any penalties (essentially expanding the new program for foreign residents to include taxpayers who reside in the US). 
2) Taxpayers who have reasonable cause, or inadvertently failed to file ("benign actors"), should be able to pay the lower non-wilful FBAR penalties without having to opt out of the OVDP. 
3) Taxpayers who are not category 1 or 2 should come forward under the current OVDP rules.
Thanks to Mr. Mishory!

Addendum 1/10/13 4:30pm.

I have reviewed the report and offer the following comments:

1.  I note the table indicating long processing times both for the initial round and the opt outs.  For example, the 2009 processing time without opt outs was apparently 307.3 days.  But keep in mind, the IRS was creating new processes for 2009 OVDP and the length of the processing time probably reflects substantial delay as the processes were created and implemented.  Probably a better statistic is the 2011 OVDI processing time of 116 days.  Similarly, the times for opt outs are 548 in 2009 OVDP and 176 ini 2011 OVDI, also certainly reflecting having to create the wheel for the 2009 OVDP opt outs.

2.  Note that 280 opted out of 2009 OVDP from the total dataset of 11,161.  A comparable statistic is not available for 2011 OVDI because many, probably most of those cases have not reached the opt out stage.

3.  I provide download here an Excel file with those statistics straight from the report, but changing only the number of days so that, in the spreadsheet, they are in number format (i.e., I delete the text "days") for easier statistical analysis for those wishing to play around with the numbers.  The spreadsheet is here.  [I am having difficulty uploading the file and will try again tomorrow.]

4.  The report says:  "Although the IRS has not closed very many opt-out cases, the average civil FBAR penalty assessed against those opting out of the 2009 OVDP is only $15,737.19."  Although no detail is given (and the devil is often in the detail), generally speaking I think this gives some reassurance that the IRS is not being draconian on the opt outs, as many feared it would be.  Of course, extrapolating from that average a result in any particular case will require experience and judgment and careful attention to the facts of the taxpayer considering opt out.

5.  The report then makes the following statement:
Moreover, the IRS has not initiated any criminal prosecutions against those who opted out. In other words, the IRS required benign actors with minor FBAR violations to spend the time to apply to the 2009 OVDP, incur significant fees for representation, and wait for about a year and a half for the IRS to process their cases (on average), all in an effort to collect very little FBAR penalty revenue.
The point of the second sentence is a valid one.  There is a lot of delay and processing costs incurred for relatively little on the opt outs.  I am not sure that the implication of the first sentence is correct, however.  There should be no criminal prosecutions on opt out because the criminal "amnesty" is not waived by opting out.  Of course, taxpayers who not only do not cooperate on opt out but commit some new criminal act open themselves up to criminal prosecution.  But that would be rare and would not be a result of their having opted out.

6.  The report further says:
The IRS should be reducing (rather than increasing) the burden of correcting prior noncompliance and the burden of reporting foreign accounts in the future, given the existing compliance problem. While an estimated five to seven million U.S. citizens reside abroad and many U.S. residents also have FBAR filing requirements, the IRS received only 741,249 FBAR filings in 2011. In the face of what may be a serious FBAR compliance problem, the government opened only 3,220 civil FBAR examinations and 18 criminal investigations in calendar year (CY) 2011.
It is hard what to know what precisely these statistics mean, but they do indicate that which we always knew -- that the IRS's civil and criminal investigative resources are hardly sufficient to cover more than a relatively small subset of past and future evaders via offshore accounts.  Although the IRS is doing what it can, given its resources, there likely will continue to be significant revenue loss through offshore accounts.  As in all criminal initiatives, the IRS's goal is to mount a credible criminal enforcement campaign that will encourage the maximum compliance at an acceptable enforcement cost.


  1. Thanks for sharing this article, I have heard so many stores recently about allergy federal way. I don't know much about it, even after reading this article, It was helpful, but I still have a lot to learn about it. I just hope something like this never happens to me!

  2. #2, non-wilful penalties. Let's see, that's $10,000 per infraction? Let's say I had 10 accounts because I actually live in Canada, a "foreign" country where all my so-called "foreign" accounts are. Since there is six year statute of limitations, the maximum non-willful fine would be: 10 accounts x $10,000 x six years = $600,000. How is that going to lead to compliance? If you want to stop the renunciations, you have to simply exempt people who accounts in the country where they live and pay their taxes. Everything else is an abuse of the Bank Secrecy Act. Period. Peter W. Dunn

  3. The NTA report follows the public statements she has been making since Shulman left, so pleased that it gets attention in the Report no one in Congress reads. However, it is a powerful tool of reference to use when communicating with legislators about the harm the IRS is doing.

    Also, I would note: MSP 15 "Challenges Persist for International Taxpayers as the IRS Moves Slowly to Address Their Needs"

    In that one, some of her Conclusions also reference the VD programs and FBAR

    5. Develop a method of simplified tax and information reporting online, modeled after the new online FBAR form for taxpayers incurring foreign taxes higher than the U.S. effective tax rate — resulting in no tax liability.

    6. Establish a voluntary compliance program for international individuals, including a combination of simplified filing and relief from all penalties for taxpayers who have no liability.

    7. Increase the threshold for the Streamlined Nonresident Filing Initiative from $1,500 of tax due to $10,000.

    Here is the links to those specific MSPs...

    MSP 8

    MSP 15

    I am still looking for any references to the plight of minnow immigrants to America who have fallen afoul of the FBAR reporting. There story is not specifically called out that I can see, but maybe I have missed it.

    Finally, on an emotional level of "Loss of Trust", this post by Victoria merits reading...

    Three Cheers for the Taxpayer Advocate Service

  4. "Although the IRS has not closed very many opt-out cases, the average
    civil FBAR penalty assessed against those opting out of the 2009 OVDP is
    only $15,737.19." Although no detail is given (and the devil is often
    in the detail), generally speaking I think this gives some reassurance
    that the IRS is not being draconian on the opt outs, as many feared it
    would be.


    I agree that the IRS is very likely not being draconian, but even the 'average' word has multiple interpretations.

    1) Is 'average' mean or median ? The median could be reasonable, but include some hefty higher end penalties.

    2) Does it include people who were actually fined, or all people (including those for whom reasonable cause existed and hence were not fined) ? For 2009, participants could argue (before the withdrawal of FAQ 35) reasonable cause within the program, so its not even entirely clear what 'opt out' means, i.e. did these people actually opt out or just invoke FAQ 35 ? [ I suspect they did opt out either because FAQ 35 had been withdrawn or they did not invoke it]

    Beyond that, people who chose to opt out are likely self-selected -- i.e. those participants who have very good stories, so the number could be a little misleading.

    Just more ambiguity in general ..

  5. Researcher, thanks for your comments. The data are inconclusive and, of course, there is self-selection -- i.e., the really bad guys do not opt out. Perhaps worse, many of the good guys do not either, preferring instead to walk away from the uncertainty of opt out just to move on with their lives.


  6. Jack - not sure these average processing times mean anything either. I am in 2011 OVDI. I submitted a complete package with just 2 years of returns (I am a foreign citizen on work visa in the US). The only communication I have had with the agent was to sign my extension of time for assessing tax (since the FBAR extension had no relevance). I have been waiting now for over 400 days....

  7. Thanks for the update and commentary.

    I would also note MSP 15. Challenges Persist for International Taxpayers as the IRS Moves
    Slowly to Address Their Needs

    Especially Take note of Conclusions:

    5. Develop a method of simplified tax and information reporting online, modeled after the new online FBAR form for taxpayers incurring foreign taxes higher than the U.S. effective tax rate — resulting in no tax liability.

    6. Establish a voluntary compliance program for international individuals, including a combination of simplified filing and relief from all penalties for taxpayers who have no liability.

    7. Increase the threshold for the Streamlined Nonresident Filing Initiative from $1,500 of tax due to $10,000.

    Finally, speaking to the Identity Theft issues, I do think the coming FATCA's outing of the 6.3 million Americans living abroad may indeed be the next identity theft battlefield.

  8. If the final penalty in my OVDI case works out to be overly unreasonable, i am planning to contact the Taxpayer Advocate service with the hope that they will accept my case. I would appreciate if anyone having experience working with them can provide some insight into the following points:

    1) The typical help they can render with reference to the OVDI issue.

    2) Hiring an attorney vs approaching the TAS

    3) Since there is limited time to respond to OVDI letters, after contacting the TAS and if they accept the case, how long do they normally take to spring into action? ..


  9. Don't you already know what your penalty is going into the program?

  10. Yes i do know my penalty. To clarify, I was trying to understand how TAS can help from an opt out standpoint.


  11. I have no experience with TAS but based on what I've read (here and on the TAS site,)
    1) They will likely review the facts and circumstances that you would provide on optout and negotiate with the IRS on your behalf for a penalty TAS considers appropriate
    2) Attorney/TAS isn't an either/or decision; you can approach both. In my opinion (assuming your facts indicate you were non willful, or even better, had reasonable cause) you should approach the TAS, regardless of whether or not you have an attorney.

    An attorney can be of help in presenting your case (identify what facts/circumstances are helpful, which are irrelevant or negative.) Needless to say, such an attorney should have experience in the area, look favorably on you (many are not too sympathetic and that's not good) and realistic about your chances (many are pessimistic, or at least highly risk averse and would rarely suggest optout.)

    TAS is free, an attorney is expensive. Unfortunately for smaller accounts this has to be considered, since legal costs may exceed any penalty reductions the attorney may help achieve. Hiring an attorney often requires a minimum number of hours, as it is hard to get an attorney interested in just providing an hour or two of his time, and it's really hard to develop all the relevant facts, review information, etc. and know enough to be able to give good advice without knowing all the details.

    Jack Townsend does offer a two hour consultation (part of that time is spent by him reviewing the info you send him, part speaking with you on the phone.) See the "Before contacting Jack Townsend" link.
    3. The TAS will spring into action quickly and can get you extra time to decide, so as long as you approach them when you are told to decide to accept the penalty or opt out, you should be fine.

  12. The $15,737 average penalty figure doesn't say much without knowing the average high balance. It would be more meaningful to see the raw data or at least what the average penalty was for accounts within several ranges of high balance.

  13. To learn more about how the Taxpayer Advocate has helped someone, read the story of Mr. Just Me at

    To save time, you can start reading from his experiences as of June 30.

  14. One does not necessarily know their penalty when they enter the program, even though they have to calculate an "In Lieu of" penalty in their submission. I think the question comes up for several reasons. One of them may be that their bank only issues one statement a year and the OVDI participant wonders if the examiner will accept it. What about if there are missing statements? Another could be because perhaps the participant feels an account should not be included in the penalty base as it falls into a gray area. Another area of uncertainty might be if one has asked for a reduced penalty under FAQ 52. Until the agent discusses it with you, you do not know if the agent will consider you qualified. If one has property overseas and that is to be penalized, until you speak with the agent, one does not know what could be accepted as a proper valuation. So the "certainty" of the In Lieu of penalty, is often actually uncertain.

  15. Jack & everyone -

    Another area concerning OVDP that is not addressed online is the impact of an OVDP settlement on a potential (future) citizenship application. Suppose a person entering the OVDP process is a permanent resident who non-willfully did not file FBARs and did not report minimal overseas income (from legitimate sources). After going through the harrowing OVDP process, what is the impact of this settlement on a future citizenship application?

    The form for citizenship applications (N-400) might require the person to disclose this settlement - example Section D Good Moral Character - questions 15, 19 - which may affect the approval of citizenship.

    Seems harsh for a non-willful offender.

    I'm hoping someone can provide at least some guidance (or a case example) in this area.


  16. I can't speak to the citizenship application issues because I have not yet addressed it. However, the inside the program penalties (no opt-out) are (i) accuracy related (not fraud) and (ii) IRS miscellaneous penalty (not fraud also). Hence, while the conduct behind the penalties might or might not involve some moral culpability, there are no findings of moral culpability or fraud for a taxpayer accepting the inside penalties.

    Opting our could be dicier. If the IRS were, on opt out, to assert -- and be sustained in the assertion -- either civil fraud for income tax purposes (civil fraud penalty and unlimited statute of limitations) and/or the willful FBAR penalty, then the questions that must be answered on the citizenship application must be considered very carefully.

    Note, also, that the inside penalty being IRS penalties are generally not available to other government agencies except in narrow circumstances. I have not researched those circumstances as they may apply to citizenship. However, upon an opt out, if the FBAR penalties are asserted, those penalties would likely be available for the agency to consider.

    I hope someone who is more familiar with the citizenship process will offer more than I can on that process.


    Jack Townsend

  17. Here is an article, written by an immigration lawyer, that touches on the issue.

  18. Two questions to tax Gurus. Any help is appreciated.

    Q1: I am planning to transfer close to $700,000 to India to invest (all are my legal post-tax savings). Are there any laws, procedures, forms to file, etc etc. I need to follow before I do this? As IRS is increasingly engaging in enforcement of all foreign account things, I want to make sure I don't make any mistakes that could cost me heavily now or later.

    Q2: Also, in this era of of highly-technical-legal-complex-and-ever-changing-tax code that all foreign investors should adhere to and comply, any guidance on how do I select a good CPA that is thoroughly knowledgeable in international tax matters, almost as good as a good attorney in this area? The CPAs in this area must be aware and always updated in the "daily-changing" tax law (one day there is an FBAR, the other day there is 8938, then there is a FAQ on OVDP, then a faq is withdrawn, then it is added back, then some guidance is issued, then it is quickly modified next day . . . this is what IRS is doing with international tax)

    A few good CPAs I know have NO CLUE on these matters; even most attorneys have NO CLUE. Who would Jack Townsend choose for his CPA if he had international investments? How d o I go about this?

  19. I am not a 'tax guru', just someone involved in OVDI.

    Q1: I am assuming you would transfer the funds by bank wire. Should there be any suspicious behavior the bank would file a suspicious activity report, but all the reporting obligations (as far as I know) are the bank's. Of course it's good to be open with your banker about why you are transfering the money, source, etc. A good banker will often ask those questions not in regards to the IRS but to protect you from the numerous scams. But if you are transfering 700K, you really should have an accountant who can answer those questions for you, which brings us to question 2.

    Q2. As I said I am in OVDI and used a CPA referred to me by my lawyer to amend returns. He's very expensive but at least seems to know what he's doing. You might contact one of the OVDI lawyers for a referral.

    I agree that most CPAs even very good ones have no clue, that was my experience when searching out someone cheaper than the one my lawyer referred me to.

    1. Hi anon February 8, 2013
      Is your CPA in the east coast? Will you be so kind to give his contact info? In what way is it important to have a very good CPA? I got the impression that they all follow the exact guidelines, although I find hard to explain some financial products in my origin country... But never the less it seems like they are just comparing it to what they know from dealing with local issues...
      Am I missing something?

  20. I recommend you talk with Alison Muecke with PKF in Houston, TX. She is expert on the range of issues I think you need.

    Her profile is here:


    Jack Townsend


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