On September 13, 2010 IRS officially announced the PFIC workaround I blogged about on August 11, 2010.  It gives taxpayers the ability to use the “mark-to-market” system in calculating income from foreign mutual funds and other passive foreign investment companies.

Marie Sapire of Tax Notes Today wrote an article in the September 14, 2010 issue (2010 TNT 177-3) about the IRS announcement and graciously included a quote from me.  Yay I’m micro-famous.  🙂


Practitioners are generally pleased with the IRS’s solution to the PFIC problem. “In announcing the PFIC workaround, the IRS has provided a pragmatic solution to a paperwork problem facing revenue agents and taxpayers,” said Philip D. W. Hodgen, partner of the Hodgen  Law Group PC. “Perhaps the Service will find another pragmatic solution to break the voluntary disclosure program logjam — like applying the IRM guidelines for [foreign bank account report] penalty assessment in low tax liability cases,” he said.

Yeah, it staggers me how the IRS can blithely ignore its own procedures, manuals, and existing methods of operation. Because what we’re seeing is approximately the following in our offshore amnesty cases: the Revenue Agent says “Take the 20% or we will max out every conceivable penalty we can throw at you.”

At the extreme, this is causing divide-by-zero errors. Penalties = big, actual tax liability = $0.00. Yes the Treasury has not been damaged to the tune of one cent. And for these cases the Revenue Agents are denying FAQ #9 treatment on a variety of hypertechnical grounds that would make a medieval theologian blush with embarrassment for debating how many angels can dance on the head of a pin. That is the extreme. But we see cases in which the unreported income over six years is an amount that in a normal audit wouldn’t even make you blink, but in these cases the IRS is going all Rambo. Example. Twenty. Eight. Dollar. Item. In a normal audit the agent wouldn’t even give this a second thought.

This “one size fits all” process is fueling a logjam in the audit system. Give people a reasonable, fair resolution, and they’ll take it, Mr. Commissioner. You’ll close the cases, look like a hero, and your Revenue Agents can get back to work.

In other news, our backlog of cases for which we are giving expatriation advice — people giving up citizenship and permanent resident visa status — is up sharply.

Must be a coincidence.