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.
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)
Subject: RE: VDP Case
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)
The Taxpayer answers the IRS agent as follows:
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.
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:
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.
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.