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September 22, 2010 - Phil Hodgen

A third real-life Voluntary Disclosure Program story

This arrived by email today with instructions to post anonymously. I do not know him, we do not represent him, and i wouldnt recognize him if I bumped into him on the street.

Phil,

I am writing as an American who has worked overseas for a good part of his career. While overseas, I rose high up in a company with major operations in Switzerland. I also held financial accounts there and most all of the income with respect to my foreign accounts was disclosed on my 1040s. However, in a review conducted by my accountant it was discovered that not all of the income was reported correctly nor did we file the necessary FABR forms (TD F 90-22.1).

After spending about $40K in professional and legal fees, we have filed the FBARs for the past six years and amended all of my tax returns. The net impact of the changes is that I am now due a refund of $398 from the IRS and my adjusted gross income over the past six years changed by less than 1% — almost zero.

Furthermore, of the income earned on the foreign accounts, $271,623 was already recognized on the original 1040 returns filed timely and the amended returns actually reduced this amount due to offsetting items to $270,355. In other words, I reported more than 100% of all the foreign income already on my original 1040 tax returns.

However, the IRS is deeming my failure to file the FBARs and disclose my accounts as ”willful” and either I am subject to huge penalties – which I am advised could exceed $7 million. Or, alternatively, I can stay in the “Amnesty Program” which was launched last year and just pay a fine of 20% of the highest balance over the past six years, which in my instance will be more than a $1,000,000!

In short, I am writing to ask why don’t we have rules that limit the penalties for failure to file FBAR’s to only instances where the failure meaningfully under reports income? Frankly, I know of younger Americans who are working overseas and are tracking with keen interest what is happing to me and others and are starting to wonder the value of being a US Citizen. I’m glad I am one and that I kept my citizenship over the years, but it is getting hard to justify this to colleagues of mine who have opted out over the years to become citizens of other countries.

I am writing your blog in hopes that if enough citizens speak up perhaps the rules will be changed (and retroactively) and the penalties for filing FBARs will not be so onerous and bear more of a relationship to the amount of tax that was not properly paid to the IRS.

Perverse incentives.

Voluntary Disclosure