Another Voluntary Disclosure tragedy, with added IRS sandbagging


Posted by:
Phil Hodgen

Written on:
April 5, 2011

Posted in:
Americans abroad
Voluntary Disclosure

The following exchange has been posted with permission of the Taxpayer.  I have attempted to take out identifying information.  The Taxpayer’s Voluntary Disclosure case is still pending.

Taxpayer’s email to me

I saw a few postings online in regard to the VD real life participant stories.  I was hoping to share mine as I am at a total loss as to what to do from here.

I have resided in (Country) since 2003.

I filed taxed returns in 2003 & 2004 as we (my husband & I) had losses with our business in (Country) & I was advised we could do a NOL & carry it back to the preceding profitable filings in the USA.  At this time FBAR were also filed for 2004 & 2005. The money in the accounts was money transferred from the USA & a business account.

In 2005 I dissolved my marriage of 11 years & my partnership in our business.

I did not file 1040’s (2005-2009)  as I did not realize I was required to, as I qualified for the Foreign Earned Income Exclusion.

In Oct 2005 my share of proceeds ($90,000) from the sale of my primary residence were deposited into my bank account.

I received a notification from the Tax Agent that had assisted with the NOL carry backs in regard to the Voluntary Disclosure in late 2009.  I contacted him but having no means to pay the fees for them to process my VD I went about it on my own.  Thinking I was doing the right thing.

The long & short is I have now received Form 906 requesting $16,xxx.  I don’t not agree with Closing Agreement nor do I have $16,xxx to pay  the penalty.

Note well:  the taxpayer is a normal American, living abroad, living an ordinary life.

Can’t pay amnesty penalty

The Taxpayer has decided that this penalty is wrong.  Furthermore, she is not in a position to pay the penalty anyway.  Here is what she wrote to the Revenue Agent handling her case.

I am in receipt of your letter dated 25 February 2011.

I cannot sign the Closing Agreement on Final Determination.

I believe that my participation in the Voluntary Disclosure was misunderstood.

It was my understanding that the objective of the program was to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax, into compliance with United States tax laws. I by no means was trying to maintain an undisclosed “secret” foreign financial account. Nor was I avoiding or evading tax owed to the United States.

Additionally I read that taxpayers who reported and paid tax on all their taxable income but did not file FBARs, should not participate in the Voluntary Disclosure – I had not filed my tax returns, so I had unreported income, but had NO tax owing as I qualified for the Foreign Earned Income Exclusion so I thought it best to participate as it was a bit of a grey area.  In hindsight I don’t believe I was really a candidate for the Voluntary Disclosure, but was trying to do the right thing. I suppose I should have merely filed the delinquent FBARs with the Department of Treasury, attaching a statement explaining why the reports were filed late. It was also my understanding that the IRS would not impose a penalty for the failure to file the delinquent FBARs if there were no underreported tax liabilities and the FBARs are filed. Is this not the case?

I believe I have REASONABLE CAUSE as to why the FBARS were not filed and it was by no means DUE TO WILLFUL NEGLECT

I am an average American citizen who has been residing in (Country) since 2003.

In late 2005 I dissolved my marriage of 11 years.  This was an extremely difficult time in my life.   My marriage was over. I was residing in a foreign country with no family support.  I dissolved my partnership in our business in (Country), which had been my primary source of income.  I had to sell my primary residence. I had to find employment which proved extremely difficult as my area of expertise wasn’t relevant/recognized in (Country). Additionally I had the challenge of continuing to reside in (Country) as my Resident Visa was all tied to the business which I was no longer a partner to. It was like I was starting life all over again.

In early 2006 I was very sick & diagnosed with Mononucleosis, at the same time I was trying to sort out what the options for my Resident Visa were.  I enrolled in school, travelling 2 hours each way, three times a week so I could meet the requirement of the Resident Visa scheme by attending school. At the same time I was working to support myself.  Additionally I was looking to replace my primary residence.  In May 2006, I discovered I was enrolled in the wrong course of study needing a degree in business studies, and not a diploma in accounting as I was enrolled.  So I was back to the drawing board. This was an extremely nerve-racking & stressful time for me.  I enrolled in school fulltime, paying extremely high tuition as I was still considered an overseas student.  Every spare minute that I wasn’t in school was spent working to support myself & pay my mortgage.  It was not an easy time by any means.

During this period my portion of the proceeds from the sale of my primary residence were deposited into my bank account. Six months later the money was taken out of the account & used as down payment on a new primary residence & tuition.

I can establish that there were NO applicable U.S taxes owing on the funds deposited into the account, even with the interest earnings, no tax was owed.

I have battled financially putting myself through school & working to support myself. I definitely am not a wealthy citizen who has been dodging the IRS & US tax obligations. My aggregate income for 2005 – 2008 was $22,422 per annum.   I merely live pay check to pay check.  I do not have a savings account. I don’t live extravagantly,  after my everyday expenses I have very little left over. My current salary is $45,500 so a penalty which is 36% of my annual income has caused me great distress.  I do not have the means to pay the penalty as set out. Even paying the penalty over a 10 year period would be a major hardship on my meagre finances.

I would hope the IRS would find my circumstances at the time extremely difficult & inturn be a reasonable cause for my failure to file the FBAR in relation to the real estate proceeds from the sale of a primary residence as mentioned above.  My failure to file was not because of wilful neglect.  I do hope this will be taken into consideration.

I write this in good will & honest faith.

Regards,

(Taxpayer’s Name)

Revenue Agent’s effort to help is shot down by his boss

The emails from the IRS Revenue Agent are revealing.  I have had dealings with him. My experience is that he is straightforward.

What I see here is an attempt by the Revenue Agent to prevent an injustice, and his attempt is shot down by his supervisor hiding behind a fig leaf.

The history of FAQ #35

When the IRS started the Voluntary Disclosure Program in March, 2009, they they offered two possible resolutions for people who signed up.  Participants in the program would either pay a penalty of 20% of the high balance of the account, or would pay the penalties that would normally be applied in a regular audit.  This second option is “FAQ #35″ and refers to the FAQ on the IRS’s website which described this option.

In February, 2011, the IRS cancelled FAQ #35 unilaterally. People who were in the Voluntary Program suddenly had the rules changed on them.  The deal that they thought had been offered to them was suddenly gone.

The Revenue Agent handling her case now nevertheless gave it a shot on her behalf.

Effort by Revenue Agent

Watch what happens.  The Revenue Agent reaches out to the Taxpayer, asking a question which should lead to a conclusion of mitigating circumstances justifying a lower (or zero) penalty under the Internal Revenue Manual.  He gets an answer, goes to his supervisor, and gets rejected because the Taxpayer (a complete novice in the arcane art of tax procedure) didn’t do something that the IRS should have done themselves.

First, the Revenue Agent reaches out for something to show that the Taxpayer acted reasonably and is entitled to penalty relief.

From: (Revenue Agent)
Sent: (Date)
To: (Taxpayer)

Subject: RE: VDP Case

Ms. (Taxpayer):

How much did you know about the filing requirements for FBAR’s, and when did you learn about the requirements?

(Revenue Agent)-Revenue Agent
Internal Revenue Service
(Agent’s Street Address)
(Agent’s City/State/Zip)
(Agent’s Phone
(Agent’s Fax)

The Taxpayer answers the IRS agent as follows:

From: (Taxpayer)
Sent: (Date)
To: (Revenue Agent)
Subject: RE: VDP Case

Hi (Revenue Agent):

In September 2009 the Offshore Voluntary Disclosure program was brought to my attention.  I looked on line to find out more about the program, learning the deadline was not far off that’s when I opted to participate.  I suppose I should have sought professional tax advice, I actually inquired but the cost was somewhere around $300 an hour, which I could not afford.  Thus began my research into the US requirements.  I did not realize I was required to continue to file tax returns in the US, as I was paying income tax to (Country) locally.

Regards,
(Taxpayer)

This, in my experience, is normal behavior and demonstrates a normal level of understanding of tax procedure and paperwork on the part of taxpayers.

IRS Supervisor response

The Revenue Agent checks with his supervisor, then answers the Taxpayer:

(Email Header)

(Taxpayer):

I forwarded you E-mails to my supervisor, (IRS Supervisor), in (Another City), (State), for his review and input. He suggested I look through your case file to see if you and prior Revenue Agent, (Different Revenue Agent), ever discussed FAQ #35, prior to the FAQ’s termination effective February 9, 2011. If such had been the case, there may have been a chance that you would have qualified for a lesser FBAR penalty, rather than the 20% Offshore Penalty. However, I thoroughly examined the work papers that (Different Revenue Agent) had compiled in your case file, and I didn’t find any reference to the FAQ #35 matter. Hence, I regret to say that the $16,xxx, 20% Offshore Penalty will have to stand.

You have a couple of options-you can pay the $16,xxx Offshore Penalty or you can request to OPT OUT of the Voluntary Disclosure Program. If you opt out of the VDP program, you would be subject to an audit, which may subject you to willful FBAR penalties, which would probably be more than the 20% O/S penalty amount. The decision is up to you, but please let me know what course of action you intend to take by (Date). Thanks!

Read it and weep.

Morally despicable

Here’s what happened, IRS.

You had a low-income American living abroad.  She screwed up her paperwork through ignorance.  She owed no money at all to the United States for income tax.  It’s a purely paperwork problem.

She was trying to clean up her paperwork by herself, without a lawyer or an accountant — because she can’t afford one.

You, IRS, were the people in full control of the situation, the ones with the complete knowledge of the procedures, and the Taxpayer’s options.

The prior Revenue Agent handling this case could have suggested FAQ #35 to the Taxpayer.  He didn’t.  The Taxpayer probably didn’t know enough to raise FAQ #35 as a possibility.  In other words, if she had uttered the Magic Word and if that had been documented in the file by the IRS, then all would be well.  But she didn’t.  Because she didn’t know.

So she’s stony broke, vulnerable, uninformed, and trying to do the right thing.

  • (Different Revenue Agent) could have raised the possibility of FAQ #35.  He didn’t.  He sandbagged the taxpayer.
  • The IRS Commissioner could have stuck to the deal that he offered participants in the Voluntary Disclosure Program.  He didn’t.  He cancelled FAQ #35 unilaterally. He reneged.

This is morally despicable.

Another Voluntary Disclosure tragedy, with added IRS sandbagging by
  • Don

    Doug – think back to your days at Harvard, going into Annenburg Hall for dinner and watching all the ordinary people walking along Kirkland St (and walking in front of the fire station)…..would this be fair????? The letter of the law says to be harsh, but the treatment of this woman does not reflect the spirit of the law – why don’t you ring up Larry Summers for advise he’s back at Harvard.

  • Michael J. Miller

    If I were the taxpayer, I’d tell the IRS to go fly a kite. Let them convince DOJ to bring this case.

    • http://hodgen.com/ Phil

      Michael,

      Let’s hope the taxpayer who wrote this sees your response and takes heart. Thanks for commenting.

      Phil

    • Jon

      Mr. Miller

      As I understand, it the IRS would have to establish a wilfulness penalty in court (regular or Tax ?) and then sue to collect ? The chances of being able to establish a wilfulness penalty are pretty minor for this taxpayer.

      On the other hand, even a nonwilful penalty for 6 years would be 60K, which is horrendous And for a small taxpayer unable to afford legal representation, even the possibility of an IRS suit is frightening.

    • Dave

      I think the key point of telling the IRS to go fly a kite is that you don’t bother fighting at all (and hence needing expensive representation). Ms Taxpayer doesn’t live in the US so there is nothing that can be done by the IRS to collect any judgment that they obtain (for non-US assets anyhow).

      The general public policy of every country I’ve looked at as is to specifically prohibit the enforcement of other countries’ taxes/fines/penalties/levies/etc. Probably to do with the common law principle of The Revenue Rule. Criminal aspects are different of course but the hurdles the IRS would have to jump would be enormous (i.e. lack of sufficient seriousness in meeting the threshold for gaining cooperation by the country’s authorities, probable lack of dual criminality for the conduct, probable conflict with that country’s public policy, and massive expense to the US of actually conducting a proceeding). Having citizenship of that foreign country would be the final nail in the coffin of any potential action.

      Of course if Ms Taxpayer ever wants to go back to the US then that is problematic. I imagine the IRS will be tagging the non-believers in TECS for takedown if we ever show up at a US airport (http://cryptome.info/irs-ci/36426.html).

      BTW: I’m a fan of the “go fly a kite” approach. Horses for courses though.

    • http://hodgen.com/ Phil

      @Dave,

      I’m with you on this one. Assuming that Ms. Taxpayer can avoid the US in the future and gets another passport, why bother.

    • Damsel in Distress

      @ Michael, Jon & Phil:

      Ms. Taxpayer at some point will return to the US not necessaruly to reside but to visit family. Additioanlly my PR still has not been confirmed & it could take another 2 year (a whole other story!) so my application for citizenship is quite a few years off & if by chance my PR is not approved I will have no option but to return stateside.

      At this point I see no other option but to Opt Out of VDP as I dont have the 16K the IRS is demanding. I must notify the IRS of my decision my Monday 11 April.

  • Damsel in Distress

    The taxpayer will definitely have her eye on this blog over the next few days. I quite like Don’s suggestion! It all seems beyond ludicrous. However taking on the IRS is also very daunting task as an individual. It is an absurd predicament that continues to cause me so much stress an anxiety…

    • mtred

      Damsel

      Not a lawyer, and this is by no means legal advice. But I might suggest asking the agent if you were to exit the program, would the penalty mitigation guidelines in the IRS manual be applicable (i.e. would the IRS even consider applying them). See here.

      1) In your case, it seems to me that you have an exceptionally good argument for reasonable cause, in which case there would be no penalty.

      2) Or even if it were not, the nonwilfulness penalty in your case would be 5K
      3) Or even if the IRS wanted to assert wilfulness (which would be pretty hard to do), in your case, the maximum penalty would be 10% of 90K = 9K

      Of course, the IRS could ignore their manual and charge the full nonwilfulness penalty, which would be 10K. Still an improvement over 16K.

      Or, the IRS could charge 100K, the full wilfulness penalty, which is truly awful. I can understand your anxiety over that.

      The agent may not know what the guidelines for penalties are for people who opt out, or he may know and he may be mistaken (I gather a different examiner would conduct a re-evaluation) — but it cant’ hurt to ask.

    • Damsel in Distress

      mtred

      Thank you for your input. All I can do is try, so I will ask. I am not familiar with the penalty migration guidelines, can anyone direct me to more information regarding this?

      *3) unfortunately my proceeds were deposited in Oct 2005 & not withdrawn until Mar 2006, so I beleive if they opted for the wilfulness I would be facing a 20K penalty.

      I just cant beleive I am in this predicament. All for thinking I was doing the right thing. Cant tell you how many times I wished this was all a bad dream & that I had never heard of VDP.

    • mtred

      Damsel

      I had posted the link before, but it got eaten up. Here it is again from the IRS web site

      http://www.irs.gov/irm/part4/irm_04-026-016.html

      Or you can google for “irs mitigation guidelines fbar”. Its very wordy, but basically you’re interested in mitigation guidelines for violations after October 2004

  • Jon

    Phil

    Based on your experience with the 2009 program, were people actually given the chance to qualify for FAQ 35 ? Other practioners seem to indicate that it seemed that the only way to qualify for FAQ 35 was to leave the program and take the risk of full wilful penalties (without any of the mitigation possibilities in the IRM) ? Or was possible qualification for reasonable cause or nonwilful dependent on individual agent/supervisor actions, and the later diktat came down that FAQ 35 simply meant that you would not be required to pay a penalty greater than current statutes (which would happen if you held assets such as real estate, painting etc) ?

    In any case this particular action seems to be outrageous. Surely, the IRS cannot withdraw a question for someone already in the program !!

    • http://hodgen.com/ Phil

      Yes we had a number of people qualify for the FAQ #35 treatment and got closing agreements. The way the IRS grants these things (or used to, since they reneged on their original deal with applicants to the Voluntary Disclosure Program) seems to be driven by whimsy. I could never really tell what would work and what wouldn’t. It was pure luck. We tried for every client that we had.

      I know that there used to be a chain of command for approval of all of these things that starts with the Revenue Agent (who appears to have no discretion at all) and ending with one John McDougal in Washington DC who appears to have his Blackberry on for every single one of these things. All 14,700 settlements. (Isn’t that insane? Talk about micromanagement.) He sits as God. So these cases are handled in true Medieval Catholic fashion. You have the sinner — the taxpayer. But the sinner can’t talk to God and have his sins absolved. You confess to the priest–the Revenue Agent. Between the Revenue Agent and God are a series of IRS priests, bishops, and cardinals. And of course the Pope.

      Whether this is still the methodology I don’t know, because the Curtain of Secrecy has dropped. If anyone out there knows what the current procedures are, please post a comment.

  • Sally

    How can they WITHDRAW FAQ #35? She went in under those conditions.

    Doesn’t the US have rule of law? Sounds like a banana republic.

  • RN

    My experience through this (owing $70k on ~$1000 tax due over 6 years) has driven me to Canada, and I will renounce US citizenship once I’ve gotten it there.

    The US gov’t. has become a tragic comedy that’s not so funny anymore.

    • http://hodgen.com/ Phil

      @RN,

      I have talked to many people who have the same intention. Some just drop off the radar.

      Our client base of people we are walking through the process of giving up green cards or U.S. citizenship is steadily increasing.

      You are not alone. Thanks for commenting.

      Phil

  • mtred

    Phil

    Do you know/have any feeling for whether the IRS is actually applying the mitigation guidelines in its manual for people who exit the VDP (or even during a regular audit in the last year or so)? Or have they decided that those particular guidelines can be “withdrawn” ?

    In “Damsel’s” case, the worst penalty that would be applicable under the guidelines is a nonnwilkful 10K for 1 year’s violation. Frankly, she should owe nothing at all since she has a very strong argument for reasonable cause.

    It seems to make very little sense for anyone not in government crosshairs go for the new VDP for small accounts/reasonable cause/nonwilfulness.

    • http://hodgen.com/ Phil

      @mtred,

      You are exactly right. For people in Damsel’s position who are wondering what to do — the new amnesty makes no sense whatsoever.

      Mr. Shulman, our current IRS Commissioner has created a program where it is smarter to not participate. He is training people to behave in precisely the way that will cause long-term damage to the Treasury.

      Perverse incentives. Punish the behavior that you are trying to encourage. Yay, Commissioner! /sarcasm

  • Don

    Message for RN – while you’re waiting for your Canadian passport – check out your family background -there’s tens of millions of Americans eligible for EU passports. Usually it’s if you have a parent or grandparent born abroad, but some countries such as Germany let you have citizenship if you can “prove” you’re German over a number of generations – check it out.

  • DK

    Damsel/Phil,

    I wonder why it takes so long for 2009’s OVDP to have a decision (or closing letter) for a participating taxpayer? Is it a normal/average time frame (one and half year)?

    • jj

      Its called government efficiency.

  • Dola

    I think if Damsel opts out from OVDP, the FBAR mitigation guidance should apply to her situation. and Damsel would pay a lot less than now no matter she is deemed willful or non-willful.. Do I miss anything?

  • Damsel in Distress

    so it continues…

    To Ms Taxpayer

    Basically, the FAQ # 35 states that no taxpayer would be assessed more in penalties than would normally be the case; i.e., if non-willful FBAR penalties were less than the 20% O/S penalty, then the taxpayer could request that FAQ # 35 be considered. The powers-that-be with regard to the VDP program, negated FAQ #35 effective February 9, 2011. My supervisor and I were hoping that you and prior Revenue Agent, Tony Duca, had discussed the option of FAQ # 35, prior to 02/09/2011, so that the #35 option might be available to you. But, from what you stated in your e-mail below, you had not discussed FAQ #35 with Mr. Duca. As to opting out of the VDP program, you need to send me an e-mail stating your desire to do so, and I would forward it to my manager, and he would send it to his supervisor for approval. With regard to an audit, this would more than likely involve non-willful versus willful FBAR penalties, as opposed to any major changes, if any, to any Form 1040’s you’ve submitted. Too, the only years that would have been subject to FBAR penalties would have been 2005 and 2006,as your balances for 2007 and 2008 were less than $10,000.00 for those years. Let me add that even if you had been eligible for FAQ #35 consideration, there is no guarantee that non-willful FBAR penalties would have been approved, in lieu of the 20% Offshore Penalty. FBAR penalties have to be approved by a Technical Advisor, who stringently interpret the willful versus non-willful penalty criteria. Thanks!

    From: Revenue Agent
    ——-

    To: Revenue Agent:

    Can you please tell me if I was to opt out would the penalty mitigation guidelines in the IRS manual be applicable?

    From: Ms taxpayer
    ——-

    To: Ms taxpayer:

    Please submit an E-mail to me, you can piggy-back it on this one, indicating your desire to opt-out of the VDP program, and I will forward it to my supervisor, who will forward it to his supervisor, for approval. With regard to mitigating guidelines, it’s basically what you knew and when you knew about the FBAR filing requirements, that determine if non-willful or willful FBAR penalties are imposed. Thanks!

    From: Revenue Agent
    ——-

    To: Revenue Agent

    I wish to opt out of the Voluntary Disclosure Program.

    From: Ms Taxpayer
    ——

    To Ms. Taxpayer:

    Thanks for you prompt responses. In re-evaluating what your non-willful FBAR penalties would be if you opted out of the VDP program, I determined them to be $19,806, which would be more than the $16,166 for the 20% Offshore Penalty. The non-willful penalty is applied as follows-if the highest bank balance is less than $10,000, then the penalty is the lesser of $500 or 10% of the highest account balance, and if the account balance is equal to or greater than $10,000, the penalty is the lesser of $5,000 or 10% of the highest balance. In your case, for the non-willful FBAR penalty, all 4 tax years, 2005 through 2008 would have to be taken into consideration.Too, unlike the computation of the 20% Offshore Penalty, transfers between accounts are not considered, and the pure highest balance is used. You certainly have the option of removing yourself from the VDP, but, if you wish I can send you a non-full pay Form 906, with additional language, pertaining to your circumstances, and you can be referred to a Revenue Officer, who will contact you, and, if feasible, set up a payment agreement plan. Please let me know what you wish to do. Thanks!!

    From: Revenue Agent
    —–

    @ Dola it appears by opting out my penalties are greater!

    Damsel IS STRESSED!!!!

    • Dola

      Damsel,

      the whole thing is so ridiculous!! Why is the agent not following the mitigation guidance? its purpose is to provide consistence and fairness.. how can this agent determine the penalty without first deciding if the mitigation guidance applies to you? i think you satisfy all of the 4 threshold conditions:
      http://www.irs.gov/irm/part4/irm_04-026-016.html

      Also take a look 4.26.16.4.6.2:
      “4. If the aggregate balance of all accounts held during the year does not exceed $50,000, then the penalty for each violation is $500, not to
      exceed a total of $5,000 in penalties.
      5. If the aggregate balance of the accounts is over $50,000, but less than $250,000, the penalty is, per violation, the lesser of $5,000 or ten per
      cent of the highest balance in the account during the year for which the account should have been reported.”

      I cannot understand where the agent’s formula comes from: “The non-willful penalty is applied as follows-if the highest bank balance is less than $10,000, then the penalty is the lesser of $500 or 10% of the highest account balance, and if the account balance is equal to or greater than $10,000, the penalty is the lesser of $5,000 or 10% of the highest balance”. you should ask him where his methodology is from..

      Pls keep us updated.
      Dola

      BTW Phil, maybe you could pls write up a post about the mitigation guidance and share with us your experiences and thoughts about it? It seems there are a lot confusions about it..

      Thank you!

    • http://hodgen.com/ Phil

      @Dola,

      I agree that the treatment Damsel is receiving is atrocious.

      I can’t promise a write-up in the near future as things are popping off like firecrackers at our office right now. We do tax returns in-house* (David Nguyen and I know how to prepare a tax return and the alarmly talented Elena Redko, who just passed all of her CPA exams and is in the midst of getting her final paperwork done to get her official ticket) and it’s a full house this week, for obvious reasons. :-)

      Maybe we could get Asher Rubenstein to do a write-up on his blog. Or perhaps Jack Townsend has done one already. I’ll have to check. Jack’s site, by the way, is solid gold. http://federaltaxcrimes.blogspot.com.

      Phil

      * we only do tax returns that have international stuff in them.

    • Dola

      Damsel,

      the whole thing is so ridiculous!! Why is the agent not following the mitigation guidance? its purpose is to provide consistence and fairness.. how can this agent determine the penalty without first deciding if the mitigation guidance applies to you? i think you satisfy all of the 4 threshold conditions (please read through):
      http://www.irs.gov/irm/part4/irm_04-026-016.html

      Also take a look 4.26.16.4.6.2:
      “4. If the aggregate balance of all accounts held during the year does not exceed $50,000, then the penalty for each violation is $500, not to
      exceed a total of $5,000 in penalties.
      5. If the aggregate balance of the accounts is over $50,000, but less than $250,000, the penalty is, per violation, the lesser of $5,000 or ten per
      cent of the highest balance in the account during the year for which the account should have been reported.”

      I cannot understand where the agent’s formula comes from: “The non-willful penalty is applied as follows-if the highest bank balance is less than $10,000, then the penalty is the lesser of $500 or 10% of the highest account balance, and if the account balance is equal to or greater than $10,000, the penalty is the lesser of $5,000 or 10% of the highest balance”. you should ask him how he came up with his methodology

      Pls keep us updated.
      Dola

      BTW Phil, maybe you could pls write up a blog post about the mitigation guidance and share with us your experiences and thoughts about it? It seems there are a lot confusions. (well i am confused now)

      Thank you!

    • Dola

      Damsel,

      Do you mind letting us know how many foreign accounts you had during the period? I reread your previous comments carefully.. you mentioned that you had 90K in 2005 and 2006 but you filed FBAR for 2005, so you will only need to pay 5K for 2006 according to the mitigation guidance. I do not know other accounts, but it seems to me the total penalty should be less than 100K.

    • http://hodgen.com/ Phil

      To everyone concerned about privacy:

      Dola knows that WordPress requires an email address with a comment. What Dola also knows (or discovered) is that you can put anything you like into the email address field and the comment will work. I personally approve all comments and if your comment moves the discussion forward it gets approved. An email address doesn’t matter to me.

      Do like Dola — make up an email address. :-) Dola’s is a string of d’s.

      Phil.

    • Dola

      i meant total penalty should be less than 10K..

    • MBK

      The Revenue agent seems like a pretty nice guy. He was under no obligation to do the calculation of the penalties till Damsel exited the program.

      As to how he did the calculation, I can’t tell, but it looks like he was saying that if you have one account > 10K, and a few others of say 1K each, then the penalty applies for each account. Not sure if he’s correct, but I assume he knows what he’s doing.

      Damsel, this is not good news. It seems that it may be too risky for you to leave the program and take the horrendous risk of a wilful violation hit (if you plan to return to the US). You may have to agree to some sort of payment plan.

    • Sally

      That’s very curious. If the aggregate balance of all accounts was less than $10,000 for 2007 and 2008, then there was no requirement to file an FBAR for those years. So there can be no FBAR penalty for 2007 and 2008. Also, Damsel said that an FBAR had been filed for 2005. So it seems that there should only be a penalty for 2006, not “all 4 tax years”.

      Could it be that the agent was in a bit of a hurry and overlooked that? It might make sense to inquire about that before doing anything else.

    • http://hodgen.com/ Phil

      @Damsel,

      Take Sally’s advice on this. Also look at IRM 4.26.16.4.7 Paragraph 4, which says that if there are multiple accounts there should only be one FBAR penalty per year except in “egregious” circumstances. I hardly think your situation is “egregious.”

      Unrelated. Just got off the phone with a Revenue Agent. We were talking about the Commissioner who is doing all this dumb stuff with offshore accounts. The Revenue Agent said that everyone at the Service except upper tier management knows that the IRS didn’t get the people they wanted to capture–the serious tax evaders. And of course that’s true. I whined a bit about the current Commissioner. He said, “Well, at least he’s not as bad as the last Commissioner!” I just about fell off my chair. That’s funny. And sad.

      Phil.

    • Dola

      @Phil,

      thank you for the pointer.. It makes me doubt whether IRS agents know/follow their guidance/manual at all? Or they have their full discretion as long as it is below the maximum penalty amount.

      sigh

    • Sally

      Why should the IRS be any different than a big company?

      It’s a rare executive who really knows what’s going wrong. Nobody wants to tell him or her, especially if the bad news will show that his or her plan is a failure.

  • Wada

    Damsel, if you’re still around, see that the IRS provided an additional 5% penalty case and made it applicable to 2009. See if it applies to you.

    “Taxpayers who are foreign residents and who meet all three of the following conditions for all of the years of their voluntary disclosure: (a) taxpayer resides in a foreign country; (b) taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and (c) taxpayer has $10,000 or less of U.S. source income each year. For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.”

    • Sally

      Yeah. But they still want 5% of the bank accounts of people who didn’t know they were US citizens. (Children of foreigners born in the US who left at a young age.)

      That’s being penalized for being born in the wrong place.

      ———–

      Anyway, the IRS will be contacting the Damsel to tell her about it.

      ———–

      Even a 5% penalty is outrageous for Damsel. The IRS needs to read its own manual. No penalty if future compliance assured.

  • Damesel in Distress

    Phil I wanted to thank you for your blog & let you & the others know the outcome.

    After much correspondence with my renvenue officer I felt it best to opt our of the VDP & take my chances should the IRS wish to pursue my case. I put my request forward.

    Meanwhile the revenue officer contacted me, suggesting I may qualify for a 5%(4,400) penalty with reasonable cause.

    I still did not believe I should have to pay even the reduced penalty. I quoted:

    The Internal Revenue Manual on why and when penalties should be assessed
    Section 4.26.16.4, Paragraph 4
    Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future.

    The revenue officer forwarded my email to his group manager…who responded … the reason Ms. Crump does not qualify for old FAQ 9 was because she failed to file her US tax returns and thus did not report all her income. The issue is, was the income timely reported on a US tax return, not was any tax due. The IRM sited below does not apply to VD cases as noted in new FAQ 50, which states, “VD examiners do not have discretion to settle cases for amounts less than what is properly due and owing”. & thought I should qualify for the 5% penlaty as I didnt have over 10K US sourced income- (I had 0$ US Sourced income!)

    I had a brief conversation w/my revenue officer @ this time who hinted that if he were to review my case outside of the VDP, he felt a warning would surffice.

    In light of all of this in early July I reconfirmed my decision to opt out of the VDP.

    On 25 July I recieved a Report of Findings & Recommendations, indicating it was determined that a warning letter should be issued, so that, should the neccessuty arise in the future for me to file FBARS w/the IRS I would do so in a timley manner.

    After 2 years my persistence paid off! I am not sure I would have had the determination to challenge the IRS if had not been for this blog. Additionally I believe the revenue agent handling my case honestly had MY best interest in mind. I have no idea if this is a common practice but am so greatful my file landed on his desk!

    I want to express much appreciation & grattitude to everyone who posted on this blog with opinions & suggestions… many that I used to continue to dispute the penalty being assesed. At last the debacle has come to an end…what a relief.

    In good female fashion, retail therapy is required, and this damsel is going out to buy a dress!