Wednesday, June 26, 2013

New Taxpayer Advocate Discussion of Problems with IRS OVDI/P Program (6/26/13)

The Taxpayer advocate has issue a new report.  The portion relate to the IRS's OVDI/P initiatives is here.  I cut and paste some of the discussion (footnotes and tables omitted):
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, as shown by the following table  
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’s 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  
* * * * 
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.
For an article discussing an Opt Out Strategy, with some assistance fro the TAO, see An OVDI Odyssey - an Opt Out Success Story (Federal Tax Crimes Blog 6/16/13), here.


  1. It's always the same story. The poor and middle class get punished, while the super wealthy get a free ride. I, a minnow living in Switzerland with massive mortgage debt, was forced to renounce US citizenship simply because of the crimes of 39 stateside tax cheats. Why does America need to harm 6 million minnows living abroad simply because a dozen or so wealthy stateside American cheat on their taxes?

  2. Figure II.4 in the TAS report is interesting. For the 2009 OVDP, there were 290 optouts (vs. 10,735 cases closed after certification, or about 3% opted out.) Another 110 were removed. (I don't understand why anyone would get to the point of being removed instead of simply opting out, since the outcome is the same, or actually worse since being removed appears noncooperative.)

    For the 2011 program, there have been 323 optouts so far compared to 3,666 closed after certification, or about 9% opt out rate. (I am comparing the number of optouts to number closed after certification, not number of total cases, since it seems likely that the decision to opt out would be generally made at the time that certification is complete.) Of the 323 optouts, only 1/3 have closed and 2/3 are still open.

    Although 8,849, or 2/3 of the cases in the 2011 program are still open, the IRS has already begun certifying 2,876 cases in the 2012 program which makes me wonder whether there is some front-end filtering going on to process bigger fish in the 2012 program before all the small fish in the 2011 program have been certified.

  3. Thank you Anonymous. I think the readers will appreciate your comments. I do.

    Jack Townsend

  4. Thanks Swiss Techie. I feel your pain.

    Jack Townsend

  5. SeniorResearcherJuly 1, 2013 at 12:05 PM

    Jack again you are a true IDIOT !!

  6. Steven SchindlerJuly 1, 2013 at 11:14 PM

    My apologies if I have missed a discussion on this topic; I've followed Jack's blog for some time now and have not seen this issue directly discussed after searching the archives. I am wondering whether an estate faces civil or criminal liability for failure to file FBARs during the decedent's lifetime. The circumstances are that decedent died in 2012. Decedent's child was appointed personal representative of the estate and shortly thereafter discovered that decedent held a brokerage account in Hong Kong. Decedent's child timely filed Forms TDF 90-22.1 and 8938 for 2012 and included income from the Hong Kong brokerage account on the decedent's 2012 income tax return, but decedent's prior income tax returns did not include income from the account, and the decedent's account professes that the decedent never advised the account of the existence of the account.

    Is the decedent's estate potentially subject to civil penalties or criminal fines for the decedent's failure to file FBARs, such that the decedent's personal representative should participate in OVDP on behalf of the decedent, or does civil and criminal liability die with the decedent, such that the decedent's personal representative need only amend prior income tax returns and expect to pay interest and penalties but not FBAR willful or nonwillful penalties?

  7. Mr. Schindler,

    I believe the answers to your questions are:

    1. Criminal liability dies with the decedent for his actions during his lifetime. His criminal culpability does not carry over to the estate. The estate / executors can be held criminally liable for their own actions (e.g., failure to file the FBAR for a foreign account owned by the estate).

    2. The decedent's civil liabilities, however, do carry over to the estate. They are debts of the estate, just like other debts (although they in some cases may have priority). An executor needs to be careful about handling such debts because the executor may assume some personal liability if they are not paid.

    3. The executor may and perhaps should in most cases join OVDP where the actions of the decedent would like trigger the willful FBAR penalty and, correspondingly, the civil fraud penalty for income tax. Of course, the principal benefit of OVDP is to mitigate or eliminate criminal risk, but criminal risk is not present because the decedent is, well, dead. But, there can still be mitigation of the civil dollar exposure. So, an estate might have a good reason to join unless the estate, with counseling, make an informed decision that, based on the facts, the IRS would not determine that the decedent acted willfully in failing to file the FBAR and would not determine that the taxpayer's tax underreporting was subject to the civil fraud penalty or the unlimited civil fraud statute of limitations. If the estate can make the latter two key decision, then it might consider not joining and just take its audit risks. However, the executor should factor in his potential personal exposure if he does not handle the estate right. Joining OVDP and resolving the matter at the estate level will mitigate -- more likely, eliminate -- the executor's risk.

    4. Obviously, the executor should consult experienced counsel in making these decisions.

    Best to you!

    Jack Townsend

  8. Mr Schindler said, "decedent's account professes that the decedent never advised the account of the existence of the account." I believe he meant "accountant" the first two times the word account was being used.

    One should exercise some skepticism over this statement, since obviously the decedent is not present to rebut the accountant's testimony.

    Also, the IRS' inability to interview the decedent makes it more difficult to prove the decedent's state of mind regarding wilfulness.

    Finally, it would appear that the funds would be eligible for the 5% OVDI penalty on inherited accounts.

  9. OVDInightmare7438July 6, 2013 at 2:51 AM

    I need some urgent help with my situation. I hope I am putting this post at the right place.

    We participated in OVDI 2011 and our matter was closed end of last year.

    We wanted to opt-out (we are minnows and our case was totally innocent) but we decided to remain in the OVDI because we wanted to put this ordeal behind us as soon as possible (given that opt-out process is a bit of black box).

    We had paid our tax liability + interest + accuracy related penalty + some extra amount(just in case our interest calculation was wrong) with the initial OVDI package submission back in 2011. We decided to pay the FBAR penalty at the end.

    As part of the closing agreement, our agent made a final determination of the total amount of money we owed (that factored in the excess amount we paid initially and the FBAR penalty).

    We paid this amount to the last penny and the closing agreement was signed to the satisfaction of both sides.

    We were beginning to forget the OVDI as a bad dream.

    Then suddenly, out of the blue, this past week we have received a deluge of IRS notices in the mail informing us that various amounts of money is due for different OVDI years.

    And to make it worse, we have also received another notice saying that even the FBAR penalty was not paid in full.

    This is reopening old wounds.

    I am not sure what to do. Based on past experience, calling the IRS service center number on the notice will probably be useless.....the folks who take the call don't even seem to have heard of OVDI and give canned answers.

    I am not sure our OVDI agent will help either as this matter is already closed.

    Any advice? Anybody here who has faced this kind of situation.

    I am amazed how much time, effort, money, stress and anxiety this process has exacted from us for the small amount of tax we owed.

  10. If you have an executed closing agreement (signed by you and IRS) then they can not assert anymore tax or penalty or interest on the disclosure. The matter is closed unless they claim there was fraud involved in the disclosure. Contact TAS and provide them a copy of the closing agreement along with the notices. You could also try contacting the revenue agent that handled the case and have him look into it. This is typical IRS blundering.

  11. OVDInightmare7438July 7, 2013 at 12:48 AM


    I think the problem is related to how IRS applied our payment to various individual tax years. Curiously, the "amount due" IRS notices are only for closed tax years (before 2008).
    It is ridiculous that we have to suffer because of process/system limitations on the IRS side that seems to be not fully capable of handling OVDI matters.I am hoping that, even though our case is closed (signed by both sides), our OVDI agent will be able to fix this problem and stop future notices.

    Yes, TAS is an option if all else fails.

  12. I agree with what Anon123 suggests. I just closed my OVDI case and had similar problems. This is another design flaw within the OVDI program. Either the agent made a mistake in the codes that were entered to close your case, or if your agent entered them correctly, the systems in the Service Center processing your returns were never adapted to OVDI requirements. I corrected my situation by contacting my agent, although for a minute, i was scared that the agent was going to blow me off to Collections. The agent did not because it was realized that I did not have the internal knowledge of IRS processing to explain what was happening. Do as Anon123 suggests, contact your agent and if that is unfruitful, then contact TAS. As more cases are closing, TAS needs to be aware that the agony for many of us drags on even after the case is closed.

  13. The solution to benevolent actors being treated the same as bad actors is simple, there just needs to be the willingness to implement it. Instead of basing the penalty on high balance, it ought to be based on unpaid taxes (the IRS already has the info from amended returns.) The bad actors would be penalized as they are now (since in the worst cases the entire account represents untaxed money) and the minnows in proportion to unpaid tax. Note that currently any accounts that were tax compliant, including non-interest-bearing accounts which by definition generated no income, are removed from the calculation.

    This would provide a proportional penalty through a simple, easy, transparent mathematical approach, without the subjectiveness of the opt out process.

  14. I am so confused by the whole process... but will try to frame a cogent question. I lived in Japan from 1993 to July 25 2010 (moved back to USA then). During those 17 years I established personal and business bank accounts in Japan and Hong Kong (having launched one business in each country). In September 2010 the accountant I had hired mentioned the FBAR requirements (which I did not know existed till then). I later entered the OVDI. A few months ago, my assigned IRS agent had a "technical adviser" rule that I am to be considered "resident" in USA for all of 2010, and as a result I am not eligible for the minimum penalties structure. If we go by the IRS's own tax code definition, I am considered resident in Japan for 2010 (and that is in fact the case for my 2010 tax return).

    However, in the OVDI it seems that technical advisers can make up the rules as they see fit. No response to my request to see their internal guidance on the residency question.

    Anyone else have any experience or comment on the residency thing?

    Also, I expect the IRS to make their "offer" under the program sometime this week. Is there any chance to bargain at that point, or is it just a "take it or opt out".kind of deal?

  15. There is no chance to "bargain", without opting out. However, it is important: 1) to make sure the highest balance is calculated correctly especially if there are stocks, foreign currency etc. involved, 2) to remove duplication, when money is transfered from one account to another, it can never be in both places at the same time. Since you were living overseas you may have had a lot of transfers from one account to another. 3) Any tax compliant accounts should be removed from the high balance calculation. This includes accounts for which you showed the income on the US tax return for that year, or any accounts that yielded no income.

    There is some flexibility in the streamlined program for overseas residents, (ie the $1,500 amount is not written in stone) though the amount of undeclared income may be too high in your case. I strongly suggest that you talk to someone at TAS familiar with OVDI (not all caseworkers are) regarding this issue.

    If you were to opt out, some of the earlier years would drop off for income tax because of statute of limitations, but of course the big risk is the FBAR penalty. You should definitely get legal advice regarding the optout decision. The deadline to sign the 906 or opt out is not set in stone, you should be able to get a bit more time by talking to your agent so you can talk to legal counsel. Speaking of which, beware of lawyers with little experience in the area and/or who assume everyone's a criminal or everyone should stay in the program.

  16. Of course they are processing the bigger fish first. They want more money quicker, so that they can demonstrate "success" sooner. That's what they did in the 2009 program. That minnows like me had many a sleepless night for a period 2 years was of no concern whatsoever to the iRS brass.

  17. Another aspect of calculating the FBAR penalty as a percentage of previously unreported income is that it would provide some proportionality to those in the non-willful category. Currently the $10,000 ceiling per year (and possibly per account) means that someone could still end up with an outrageously high non-willful penalty.

  18. The very bad actors are almost certain than they would get a higher penalty than 27.5% so for them staying in the program is a no-brainer. The lack of transparency as to what standards and criteria are used on optout results in preventing people who should opt out from doing so. At the very least the IRS should guarantee that regardless of whether or not you opt out you will only face a maximum 27.5% penalty. That seems to have been the intent behind FAQ 35 in the 2009 program. If such were the case at least the optout decision would hinge on the willingness to spend time and money to go through the optout process, without having the threat of potentially much higher penalties on opt out.

  19. Thanks very much for the detailed advice. I have got a lawyer hired to handle the opt-out, and know that his firm is a good one as we use them for our business tax work in the USA (and they are highly regarded in the local biz community).... Will report back with the results of my case when/if we ever get to a final resolution.

    All the Best,


  20. Bill Yates, former IRS attorney's comments on OVDI:

    "I had no part in OVDI, although I was part of a group that reviewed the OVDI FAQs.
    In the law dictionary where it lists “arbitrary and capricious,” the definition says, “See IRS OVDI FAQs.”

    From an interview at:

  21. John Koskinen has been nominated (subject to Senate approval) to be the new IRS Commissioner, succeeding Danny Werfel, Steven Miller, and Douglas Shulman.

  22. I just closed my OVDI case and lost all my savings. I do believe the IRS agent had made errors or that the OVDI penalty is unfair in the way that they target a percentage of the VALUE OF YOUR PROPERTY as penalty which often means a lot of money! Why go by the value I have no idea. Even my CPA was surprised. But I wind up paying almost half a million dollars for a property + multiple accounts. But the multiple accounts was a common practice where money get transferred between them, not for any fishy business. I never had time to seek help since it was required to pay within days or else there would be interests. I did consulted a tax attorney and he suggested to opt out, BUT there is a risk that IRS would do a standard audit and look for anything and potentially would mean I pay even more. That is not fair that is really not an opt out, since no one in their right mind would take that risk. The worst part is that I actually called up the TAS and I was constantly told that I was a criminal and should be happy I paid up!

  23. I'm sorry to hear about what you have been through. I really don't understand the US government. It wastes so much money and then uses sticks against its population. Such is so much different form where I live, where government spending is more restricted and people feel comfortable with the tax authorities.


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