A third real-life Voluntary Disclosure Program story

by Phil Hodgen on September 22, 2010

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.

Reader comments (7)

  • http://www.taxlitigator.com/main/images/stories/Articles/FBAR_Penalty.pdf

    This may apply to your case but…I do not know. If they are threatening 7 million maybe
    1 million is not too bad on a refund of $398.
    Simply unbelievable! Maybe worth litigation challenging the constitutionality of this Fbar penalty.

  • bravenose says Sep 26, 2010 5:27 am

    I am shocked to hear that the agent is treating your case as “wilful.” Unless you are leaving out some important facts it looks to me like maybe the agent is not acting fairly or otherwise misunderstands the law around FBAR itself.

    I represented myself through this program because I could not afford legal fees. After my first consultation the lawyer tripled the hourly fee he charged even though he knew I was not wealthy, so I was left with no option. While handling my own case I learned from research that IRS agents have to apply objective standards in determining things like “wilfulness,” etc. The explicit rules the agents work under state this. If the agent fail to act reasonably and objectively their determinations are open to challenge. I guess what I am trying to say is don’t give up. I had to ask a lot of questions of my own IRS agent and spent numerous hours reseraching on the internet and reading the IRS’s own guidelines and then in turn drafting questions to the agent handling my case. The agent, in turn, often had to seek clarifiation of my questions from his superiors. He did however do exactly this, and acted with the highest integrity. I did a far better job representing myself than the expensive lawyers I initially paid for advice ever did. And I did this by simply using the tools of my brain, pen and paper, patience, prayer, common sense, and respect shown to the IRS agent who I assumed was acting in good faith, always.

    I have nothing but praise for the agent at the IRS who handled my case. The resolution which initially seemed like a life-altering living hell turned out to be extremely reasonable and fair. What have I learned from all this? Some lawyers simply want to rip you off with little concern for justice. Some people who work for the IRS are honest and reasonable, but you have to be proactive about your case. None of what I am saying is legal advice of any sort, it is just my story from the trenches. Perhaps you want to rethink your strategy of trusting highly-paid experts instead of your own common sense. Good luck.

  • Michel J. Miller says Jan 30, 2011 6:29 pm

    Sadly, not entirely surprising. If you check in again please update us. In any case, I’d say your case has compelling facts indicating you were not willful. In my view, you should not be in the program. I would opt out and tell the IRS to take a flying leap. Based on the facts you describe the IRS has no case for a willful penalty. The penalties for nonwilful violations are far lower.

  • I used to work for the IRS. The situation Bravenose describes is the typical one. Lawyers and accountants are helpful when it comes to arcane points of law or technicalities, but the average person who wants to help themselves can so. The IRS person you deal with is obligated to answer your questions or face discipline. If you ask for general help, agents are required to determine your issues and help you to the fullest extent possible. As a rule, calls to people I worked with ended with thank you’s, not another word.
    The problem of foreign accounts isn’t that US citizens have them. It’s that rich folks secretly put their money into Swiss accounts and hid it there to avoid paying US taxes. UBS is the best known of the evaders here. They failed to report their foreign income in any way.
    I would argue that by filing returns and paying taxes, you have excluded yourself from the group that law was intended to include. Don’t forget that you can go to Tax Court and that you have appeal rights, so no one agent has absolute say over you. If you haven’t received a letter explaining why you were included in that group of tax evaders even though you filed, you should write a short letter yourself and ask for one.

  • Hi JoeD,

    Thanks for commenting. For those of you out there reading this, you have nothing to lose by giving it a shot and writing a letter.

    My experience is that the Revenue Agents have been given zero authority. They are mandated with enforcing the 20% penalty or kicking you out of the amnesty program. And my experience is that the top-tier management at the IRS doesn’t give a flying f*** about taxpayers like this. Nor do they have the vision to understand the collateral damage for the enforcement attitude they are taking.

    I have just posted a new story on the blog this morning about a caller who reported her treatment. Check it out. The government is insane.

    I agree that if the Revenue Agents were given discretion we would see sane and humane treatment of ordinary taxpayers — “Thanks for cleaning up your paperwork, and please keep it up.” Unfortunately they can’t do that. If you know any secret informal IRS procedures that can help people out, it would be great to know — publicly. As you say, tax professionals are good when it comes to points of tax law but when it comes to blind bureaucratic injustice that destroys lives, we are sometimes not able to do anything.

    Phil.

    /Phil

  • Hello bravenose,

    Would you please give me your email id because I have some doubts about FBAR penalty. Hopefully you would clarify my doubts. I am doing myself as cost prohibitive of going thru attorney or CPA

    My email id is ipkuthyar at gmail.com