September 21, 2010 - Phil Hodgen

A real life Voluntary Disclosure Program participant’s story

Over the weekend I received an email from a regular person in the amnesty program.  He is not a client of our firm, and we have never met.  I asked him if he would be willing to let me post his story on the web.  He agreed.

This person is being buffaloed into a $14,000 penalty in the Voluntary Disclosure Program when he owes only $218 of tax for all six years of 2003-2008.  If he does not take it, he is being threatened with vastly higher penalties by the IRS agent.  Much like the school yard bully.  Give him your lunch money now or he’ll be waiting for you after school.

For all of you out in the real world, this is what a foreign bank account criminal looks like to the IRS.

Shame on you, IRS.

Here is his story.

Call us stupid or naive, but we really didn’t know there was a penalty of 20% when we joined the amnesty program last year.  We just wanted to do the right thing. After informed by IRS VDP Agent of the penalty, I called FBAR and spoke with an agent in July. She gave me indication that they are not enforcing the penalty. 

I have always done our tax returns.  I am married with two teenagers and work for [major corporation everyone has heard of]. My spouse is a housewife. Our income tax returns were pretty straightforward from 2003 with 2008 with mainly W-2 salaries, some interest, and very light equity activities (all long-term gains/losses).

Now we are facing a penalty that is 6400% of the extra income tax the IRS decided I owed. It’s much easier to just pay and move on but my wife and I really don’t feel we have done anything wrong.

The problem my wife and I face is that they are the IRS. It’s like David and Goliath.  The total income we did not report from 2003 to 2008 was only $725 but they want us to pay more than $14k penalty for being honest (or stupid enough) to come forward and join the program.

I have two life insurance policies issued by a company in (Country) that I bought in the early 1990’s when I was living overseas.  I pay about $10,000 per year for the premiums on these policies. 

The policies paid survival benefits every three years which are also used to pay the premiums so all of the money stays in the policies. The interest of the survival benefits is the cause of my headache.

I did not report $725 of interest from 2003 to 2008. I didn’t know that it was taxable, because the interest payments always stayed in the insurance policy. In addition, the company simply stopped sending annual interest statements in 2007.

The survival benefits was $14,000 every three years and the IRS agent originally thought I also have to pay taxes on that. However, I argued with him since there was no gain (3 year premium is more than the survival benefit paid every three years) and he finally agreed after checking internally.

– In the end I had only $725 of unreported interest income for the six years from 2003 to 2008. 

– The tax we have to pay for 2003-2008 is $218.

– The IRS agent is telling us we have to pay a penalty of approximately $14,000. 

This is based on the cash surrender value of my life insurance policies.  I had no idea I had to file the FBAR until notified by the IRS agent.  I have a life insurance policy, not a banking account. We had no clue this is treated like a financial account, making it a requirement to file the FBAR.

The letter the IRS agent sent made us uncomfortable and we are afraid they will penalize us severely in the audit for opting out of the program. The more I read, the stronger I felt I should fight this. My case should be at the most negligence per IRS own guidelines which is $500/year max and they are supposed to take discretion.

A person or entity can know about the requirement to file but don’t file and still be negligent. They are saying I’m better off staying in the program because they are comparing with the max penalty for non-willful violation (in my phone discussion with VDP Agent).

The story is the gentleman’s. I edited his email, and he approved it. Here is his followup email to me–with a single edit within the brackets.

I made minor updates to the text [above] and you can go ahead and post it including my update and wife’s feeling.

I spoke to Agent today to update him of my request for extension and supporting documentation that the 20% is appropriate. I mentioned that my case is negligence at the most. To my surprise, he said he only considered non-willful and will-full violations for my case and was not aware that there is negligent violation. He asked me for the website and I provided to him. Wow, I have to tell IRS their own rules. He is probably a new or junior agent but no excuse for IRS particularly since he mentioned that he had reviewed my case with his manager.

In addition to faxing him my letter, I also mailed it to him along with Federal tax amendments from 2003 – 2006 (I already send him 2007 – 2008) and the document I got from IRS site on the different FBAR violations. I’ll call him later on the week to follow up.

Here is my wife’s feeling (I have to edit since her English is limited).

After reading Phil’s letter, it’s just like we get a righteous person to speak out for us.  Nobody could help or advice us in the past, not even the CPAs we spoke to. When I first read his letter, my body shook. I did not know if it was because I felt cold at that time. I put on a long sleeve shirt and tried to read again. I really hope we can get rid of this trouble ASAP. May God uses our case to help people…..I do not know.

My deep feeling is just like Psalm 142, 143 (that is my prayer to God) after we joined this trap program and IRS treats us with no basic human passion. They just want to get money. They waste our citizen tax money on our very little honest, stupid case. 

Voluntary Disclosure