TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, January 13, 2014

Taxpayer Advocate: The IRS Is Too Tough on Americans With Foreign Accounts

FATCACNN:  IRS Top Cop Says the Agency Is Too Hard on Offshore Tax Dodgers, by Lynnley Browning:

[T]he harshness -- and, at times, unevenness -- of the IRS in pursuing offshore tax dodgers has an official critic: the ombudsman of the agency.

The Congressionally appointed watchdog, Nina E. Olson, unleashed a fresh critique Thursday of the IRS's amnesty programs for Americans with undeclared offshore bank accounts. The unmistakable message from Olson, also known as the national taxpayer advocate: Many Americans get screwed over financially by entering the programs.

"The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Make Honest Mistakes," the report says. ...

Olson's report found that for the 2009 program, launched after a landmark crackdown on Swiss bank giant UBS AG for enabling wealthy Americans to dodge taxes through hidden private accounts, the average taxpayer ended up paying penalties averaging nearly four times, or 386%, of the basic tax owed.

Less wealthy taxpayers fared even worse. Olson found that the bottom 10% of those who entered the 2009 program, as measured by an average account balance of $44,885, got hit with penalties equal to nearly six times the amount of tax owed. Taxpayers wending their way through the program without legal representation got hosed even more, paying penalties of eight times. By contrast, the largest tax dodgers got socked with penalties equal to three times their unreported tax bills -- perhaps a sign of good lawyering affordable by the wealthy.

"The penalties are extraordinarily high as compared with most other penalties the IRS administers," Olson's report says.

Olson also found new evidence of another trend: Entering an amnesty program but then dropping out in exchange for being audited is a better deal, financially. Such taxpayers ended up paying on average penalties totaling only 70% of the unpaid taxes and interest -- hefty, but far less than nearly 600%.

IRS News, Tax | Permalink


Ms. Olsen's musings point up one particular defect in our current federal tax system that could be corrected with relative ease and minimal cost. The IRS needs to be divided into two more agencies. One charged with taxpayer service and guidance--that more or less has "customers," to use the business-speak still rampant in the agency--and another responsible for enforcement. The enforcement side of the agency does not have "customers" in the same, even imperfect sense as the service and guidance side. But then, I'm so old school that I believe I am a citizen, not a customer.

Posted by: Publius Novus | Jan 13, 2014 7:50:18 AM

The fees to enter into the program are incredibly high. I should know I have to charge them. The IRS OVDP examiners get more and more scrutinizing everyday.

This report by Nina is nice, but it will not make one difference.

Careers are now entrenched based on this OVDP. Things will get worse for the taxpayers who made innocent mistakes. Not better.

Posted by: Anthony E. Parent, Esq. | Jan 13, 2014 3:59:47 PM

I'd like to see a term other than "tax dodgers" used. I know someone who was born in the U.S. and has not lived there since the 1950s but is now scared stiff because the IRS is threatening to force them to back file seven years of tax returns, at a cost of many thousands of dollars. That's a cost of many thousands of dollars just to file, never mind the possible tax liability from, say, capital gains on a lifetime of savings from income earned outside of the U.S.

If Americans keep talking about this issue in terms of "tax dodgers" they are going to completely miss the important fact that millions of U.S. expatriates who've done nothing wrong are facing huge potential costs under a law that is almost universally regarded as ridiculous outside the U.S. Americans need to have serious debate about the merits of this policy, but that's not going to happen so long as it's described as a policy designed to deal with "tax dodgers."

Posted by: Tedd | Jan 13, 2014 5:15:18 PM

"But then, I'm so old school that I believe I am a citizen, not a customer." In an Age of neo-Bolshevism, dream on.

Posted by: Orson | Jan 13, 2014 5:47:11 PM

One simple fix would go a long way. It is wrong to be fining people who have never owed US taxes. Fixing this one horrible injustice would go a long way.
If the intent of the law is tax evasion, yet an individual has never evaded taxes, then obviously no fines should be levied. Yet FBAR fines people massive and unbearable amounts of money even if they never owed any taxes.
If the goal is to eliminate tax evasion, then the FBAR is simply the means. The failure to file FBAR is not the crime - tax evasion is the crime. Therefore any fines levied should have some relation to the taxes owed. Otherwise the whole procedure is a violation of the eight amendment which prevents excessive fines.

Posted by: scf | Jan 13, 2014 6:25:08 PM

I am a US citizen, now more like a US Subject.

Because of the impending costs of complying with FACTA, my long-time modest managed account with a major UK broker was ejected. Happily, I found a home at another UK brokerage firm. Later, due to the real costs of complying with FACTA, this account was ejected by this firm as well. I was able to find a Swiss broker who accepted my account, but it is self-manged and does not produce nearly as much dividend income, to the loss of the taxes I faithfully report and pay.

That is not the end of the matter. A few weeks ago, I received a letter from the Swiss firm asking me to please sign a form that waives all of my legal protections of privacy when it comes to sharing all my account data with the US IRS, and to please send them a copy of all of my previous TDF filings (the form where US Persons must report all foreign financial accounts), and my FACTA filings as well. Welcome to the land of the USED TO BE FREE.

Posted by: theBuckWheat | Jan 13, 2014 7:06:06 PM

FATCA - passed by a Democratic House and Senate and signed by Democratic President Obama. This legislation, more than any other official act, has made our expatriate citizens unwelcome overseas.

We deserve who we elect.

Posted by: Kevin P. | Jan 13, 2014 10:42:48 PM

The effect of fatca on otherwise law abiding ex patriates is an under reported travesty of justice. I have one client who has a modest retirement account in a UK tax exempt account. His holdings are in UK based mutual funds. He has attempted to comply with US tax laws, but has not been successful in navigating their complexity. Now to figure out how much back taxes he might owe would cost many, many times more than his potential tax liability. This is a US citizen who has lived full time in the UK for over 40 years

Posted by: Pauld | Jan 14, 2014 2:38:46 AM

I wonder how many of these ex-pats who are now suffering the effects of FATCA voted for Obama and the democrats in 2008 (and 2012 for that matter). FATCA was written and passed by democrats back during the two-year stretch when democrats controlled both houses and the presidency. Like the foreign locals where they live, ex-pats worship Obama like a Hindu god. Hey ex-pats: ever thought of connecting the dots from your votes to actual government policy? Ah . . . probably not . . . wouldn’t want to upset the locals.

Posted by: FrancisChalk | Jan 14, 2014 3:59:20 AM

When our government has coerced foreign governments and foreign corporations to comply with our laws? You know that we've crossed the line from freedom to tyranny.

...and we can't understand why other governments -and people around the world- hate the US?

Posted by: Warren Bonesteel | Jan 14, 2014 7:40:32 AM

Don't let the fact that the OECD is using FATCA to model a multi-national reporting requirement deter you from your idea that FATCA makes the world hate us. Such hyperbole deters helpful rational conversation.

Posted by: Daniel Waters | Jan 15, 2014 7:28:53 AM