November 9, 2009 - Phil Hodgen

A voluntary disclosure program participant speaks

This is an email I received today from someone in the voluntary disclosure program — this person is not a client of the firm. I spoke with the author and received permission to post his email online.

Note: his estimate that the total penalties would amount to 40% of his account may be inaccurate. My experience in calculating total penalties is that they are less than that. But it is sometimes possible for the “20% of high water mark” penalty to be sadistically confiscatory [that’s an editorial statement by yours truly, your opinion may vary if you work at 1111 Constitution Avenue], especially when the high-water mark is measured by the peak of the stock market, but must be paid out of the current balance.

I have made a voluntary disclosure, and thank you very much for your web site indicating the I am not alone in this situation. Below is my story, which I have also forwarded to my local representatives in Congress, although I still have not heard back. Are there any attorneys, PACs or politicians who are willing to support us “minnows”.? My account is just below $100,000, so it would make sence for me to pool together with others in my sistuation.
Any help or advise would be appreciated.

To Senator or Congressperson:

I am writing you about the recent IRS voluntary disclosure program to report undeclared offshore accounts. It is evident that this policy discriminates against naturalized American citizens and is also overly oppressive in its 40% penalty.

The original intent of this IRS program was to reap in billions of dollars from undeclared overseas accounts held by multi-millionaires. However, the collected revenues will be significantly less, as indicated from public statements from many tax attorneys. This is because the majority of citizens that are coming forward are middle income immigrants with moderate holdings established from retirement savings in their native countries well before they immigrated to the United States. Many immigrants, including myself, have could not transfer these funds to the United States into tax-advantaged retirement accounts, because the IRS has not recognized these foreign funds for retirement purposes. In my case, before immigrating to the United States, I lived and worked in Europe for a company, which offered a defined pension plan. Upon immigrating to United States, it was not possible to convert these funds into a tax-advantaged retirement account (e.g., IRA). This became evident after inquiring with the major mutual fund administrators (e.g., Fidelity, Vanguard) which claimed that they would have difficulties with the IRS if they did accept foreign funds. However, conversion of company pension funds domiciled in the United States into the tax-advantaged accounts (e.g., IRA) is a standard practice. Because of this, my account resided for a number of years in the country of origin. It is ironic that the President encourages individuals to save and then in turn allows the to pillage immigrant’s savings. A fair an equitable solution would for the IRS to consider such savings accounts as comparable to IRA accounts, provided that evidence is provided that they have been maintained as such, and to enable holders in the future to convert these to formal IRA accounts.

Although inequitable, it is nevertheless necessary to become compliant with this regulation, and have decided to make a voluntary disclosure. For accounts over only $10,000, the penalty is severe, corresponding to approximately 40% – 50% of the account balance. Even the IRS has publicly characterized the penalty system as “harsh”. Such penalties will essentially devastate past savings and significantly postpone or even prevent my ability of individuals to retire. In my case, I am 59, support two college students and an elderly parent (all also immigrants), and could face a penalty of $40,000 penalty on a $100,000 account.

In particular, those who hold modest accounts (e.g., less than $100,000) and planned to eventually return to their origin countries will most likely be forced to remain in the United States well beyond retirement age. The ultimate costs to our state health care and public services systems will far outweigh the penalty fees obtained by the IRS.

The current voluntary disclosure penalty is 40% (20% penalty on taxes due, plus interest for 6 years + 20% penalty of the account balance for any account over $10,000). This overshadows penalties for comparable programs in the United Kingdom (10% penalty on taxes due), that of the highly successful Italian program (5% penalty on taxes due), and even Canada, with zero penalties (references 1, 2 and 3). These countries have set reasonable policies in place because they are genuinely interested in bringing in unreported accounts into compliance, and not on acquiring as much money as possible. Due to the current government deficits, it is understandable that the IRS wishes to bring in more revenue, but this is unjustly being imposed by penalties on working immigrant citizens.

The IRS program has only been able to persuade a relatively small number of 7,500 of the estimated hundreds of thousands of accounts to come forward, again, many of these being held by immigrants. More significantly, it has failed to convince the multi-millionaires which the IRS had hoped to draw in, thus losing out on significant tax revenues.

Because the IRS voluntary disclosure program has now ended as of Oct. 15, 2009, anyone holding an unreported foreign account, as in the past, most likely will no longer wish to come forward out of fear of criminal retribution (see paragraphs 1 and 2, ref. 4). The IRS has repeatedly warned such prosecution for those who did not come forward under the now expired program. These criminal penalties will discourage primarily middle-income citizens from coming forward in the future. Most are employees and who cannot afford to have a criminal record. Especially since now almost all employers conduct background checks as a condition of employment, even a minor blemish on one’s record would be an impediment for future employment. This was in fact my primary motivation in participating in the IRS voluntary disclosure program. I am currently on my third position in 18 months and in the current economy may need to look for work again in the foreseeable future. However for wealthier multi-millionaires, a criminal record is less concerning, since most are likely to be financially independent. These individuals can also afford attorneys to negotiate a more favorable settlement in court. This is another way that the IRS policy is unfair towards middle income individuals.

The fact that the IRS has in recent history always had an arbitrary penalty system for voluntary disclosure has hindered individuals from coming forward in the past, out of fear of potentially landing in prison. Even a cursory visit to the IRS as well as other web sites (usually from tax attorneys advertising their services) describes the severe penalties ranging in millions of dollars and prison time for those having unreported present and/or past accounts. Thus it is not unexpected that over the past years, individuals contemplating coming forward would have been too intimidated to even risk such potential penalties.

A fair and humane practice would take into consideration the circumstances under which foreign accounts originated. Holders of foreign retirement plans established by immigrants well before coming to the United States should not be unfairly categorized as multi-millionaires skimming business profits into offshore accounts.

Undoubtedly a large number of immigrants who live in your constituency are terrified by the current situation. With the current voluntary disclosure program having ended on Oct. 15, 2009, it is expected that the IRS will invariably start imposing the 40% penalties on all those who have come forward, regardless of their circumstances or financial situation.

I would like to request that you introduce or support legislation to implement a moratorium on the imposition of current penalties, until a review of the composition of the 7,500 disclosed accounts be made. Based on this, a revised voluntary disclosure program should be implemented which is equitable for the current citizens who have honestly come forward up until now and is comparable to any future programs. It is hoped that a less discouraging system be established, since the current penalties have not been successful in terms of the revenues being obtained. Examples of more successful programs being used in other countries should be considered. These do not overly penalize immigrant citizens, and are fair due to the circumstances by which the foreign accounts came into being. The current system by which immigrants citizens are predominately being impacting clearly runs counter to the original principles of this country guaranteeing liberty and justice to all.

Due to the topic of this letter, I hope that you can understand that I am declining to provide my name. However, I can be reached at [deleted] or e-mail at [deleted] or [deleted].



We chatted for a while. I told him there is no way that any politician will stand up and assert that penalties are vastly disproportionate to the situation. What conceivable benefit is there for the random politician?

Voluntary Disclosure