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  1. 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!

  2. 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.

  3. 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.”

  4. 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.

  5. @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

  6. @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.

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. @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.

  12. 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!

  13. 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!

  14. 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!!!!

  15. 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?

  16. 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)?

  17. 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.

  18. @ 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.

  19. 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.

  20. 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.

  21. @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.

  22. @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

  23. 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.

  24. 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.

  25. @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

  26. 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.

  27. 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.

  28. 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.

  29. 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.

  30. 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 !!

  31. 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…

  32. Michael,

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

    Phil

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

  34. 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.

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