August 3, 2009 - Phil Hodgen

The IRS strategy in the FBAR amnesty

It’s a giant data sweep. With a defined aim. Unfortunately, the scheme may be turning out badly, if my experience is typical.

Here’s the plan:

  1. Announce the amnesty. Yell “Scary Monsters!” as loudly and frequently as you can, and get as much press as you can.
  2. Taxpayers apply for the amnesty so they can sleep well at night. (Note: I am not making fun of the taxpayers. There are indeed scary monsters in the tax world and whether they bite you or not sometimes depends on, shall we say, personalities moreso than principles. Say no more.)
  3. Data are collected. (Hey, how ’bout that grammar?) The IRS pays particular care and attention to asking for names of individual foreign bankers who dealt with U.S. taxpayers.
  4. Using the names of those foreign bankers, go after their employers (banks) in the same way that the IRS went after UBS.

This strategy is consistent with IRS strategy going after tax shelter promoters, even back into the dim memory banks of mygoodself when I was but a newbie tax lawyer in the early 1980s.  (Random audit of human shows Something Interesting.  Get documents from taxpayer which identifies tax shelter promoter.  Audit promoter, subpeona records of all people who bought the tax shelter.  Audit them all.)

With that in mind, let’s move on to that Step 3, shall we?  Data.  Good stuff?  Bad stuff?

My guess is that the IRS is Having A Moment.  The taxpayers who are applying for the amnesty are, shall we say, low yield candidates.  Low yield meaning in dollars and information.  The high yield candidates?  They may well be staying away in droves.

Someone is saying to the IRS, “These are not the droids you are looking for.” (YouTube).  I doubt the IRS is seeing the quality or quantity of information they had hoped for.

The reason I think this is because the IRS is scrambling to adjust its amnesty procedures, first at the intake level (Criminal Investigations used to want to do an interview, now the taxpayer just writes an essay explaining why the dog ate his/her homework), and now at the back end (calculation of taxes, penalties, and interest will be farmed out from Philadelphia to field offices because Philly is so backed up).

The cure would be pretty simple.  The major sticking point is the “20% of high balance” penalty. It’s too expensive.  Drop it to 5%.  While you’re at it, extend the deadline to December 31, 2009.  The IRS would then be seeing the type of taxpayer they are looking for.  (If you want to know what their Favorite Pinata looks like, just look at the individual plea bargains coming out of the UBS case.)

In my experience the 20% penalty is the key reason people decide to stay hidden and ignore the noise.  I know my proposed solution is morally sensitive, because this tax amnesty is all about morality for a certain segment of the political class.

But the long term tax revenue payoff would dwarf the short-term revenue loss.  Additional assets would become visible, and income generated from those assets would be taxed.  And when the taxpayer dies, well, there’s all the more money to be hit with the estate tax.

For all of you out there with hidden foreign bank accounts, remember first that it’s just money.  Life’s too short.  (Warning:  Cluetrain.)  And call me if you want to figure out your options and what to do.

Time for me to go hit the Sam Merrill Trail.

Voluntary Disclosure