I received an email from client J. last night:
Just to update you: I decided to call the IRS’s voluntary disclosure program directly to ask about the procedure.
The woman I spoke to indicated that if it turns out we don’t owe any taxes, we shouldn’t face penalties for the fact that we’ve failed to file until now. She also reassured me that lots of people are in our situation, living overseas and not knowing they had to file, and just gave me a general sense that we don’t have anything to worry about so long as we continue to cooperate.
She took our names and details, and said that since she has our information on record we’re already “in the program” (pending the check that we’re not under audit already). She said they’ll be getting back in touch with me with a letter we have to sign and mail in, but that we’re no longer bound by the Oct. 15 FBAR deadline since we’re already in the system. If we’re accepted, a revenue agent will be in touch with us within 60-90 days to move forward on getting us in compliance.
Thanks again for your advice. I’ll keep you posted on interesting developments.
Now if I could only remember where all my old account statements are hiding…
Personnel at many of the Criminal Investigations offices have been telling us for a while that we can commence the Voluntary Disclosure Program by telephone or email. This report from J. supports our experience.
Whether you should do it or not is another question. From my perspective:
So, J. If you have the power to send a single piece of paper by DHL or FedEx from your home country and have it delivered, I would say it is worth the $60 or $70 to do so. It may not be necessary. The IRS data collection systems may be tight and fool-proof.
Me personally, I don’t trust government systems and think it is worth spending the money to control my own fate.
Leaving aside my
paranoia distrust personal feelings about the fallibility of government-operated data systems, J.’s telephone call to the IRS revealed a profound systemic problem.
The problem lies with the information about IRS procedural intent (are they going to throw massive penalties at taxpayers or not). Information known outside of the IRS is cobbled together informally and is not widely known.
I have had discussions with a number of IRS people about this. In all cases they’ve said generally the Voluntary Disclosure Program is not intended to catch people like J. and hammer them with life-altering penalties. But none of them are totally sure on this. They see the written guidance in the FAQs and elsewhere. The letter of the law and the spirit of the law are at odds.
When access to information is asymmetrical, costs rise. This has been apparent throughout the Voluntary Disclosure Program. Because the IRS has been (charitably put) obscure in its procedures and intentions, taxpayer costs (mental stress, financial, everything) have been high.
Had the IRS announced to people like J. that mere paperwork errors would be solved quickly and cleanly without penalties, there would have been less unnecessary suffering on the planet. But then, if things were different they just wouldn’t be the same, right?
What might have been
FAQ #9 is flawed. I have one word for you: Remedial Freshman English.
Here’s what you could have done:
“For 2003 through 2008, if you don’t owe any tax (and we don’t care why, we just care that you don’t owe any more tax whether you reported the income correctly or not originally), file your late FBAR forms. There will be no penalties imposed. If you owe tax, pay the tax. But no penalties.
“If you left income off your tax returns for 2003 – 2008, we don’t care. Just amend and pay the tax and interest and a 20% late payment penalty just like we throw at a lot of people who omit income on their tax returns in normal situations. We won’t throw a penalty at you just because you missed the FBAR form.
“All we care about is that you log yourself into the tax system and get yourself up-to-date.”
I wouldn’t be at all surprised if this turns out to be the internal secret strategy for the IRS. Remember, after all, that the whole amnesty program was originally supposed to be a super-duper insider secret known only to the IRS in the beginning, and it is only because the info leaked out to the public that the IRS learned the virtues of transparency and documenting things clearly.
Too bad they didn’t say so out loud, from the beginning.
All you other people out there
Please share! The more information that is available publicly, the better for all of us.
At the moment the IRS hogs the information ball. Lawyers like me who are doing a lot of this work have more information than the average person, because we’re on the front lines.
I’ve tried to share what I know and think, in order to help people like J. and to help all of you who read but don’t comment or don’t even hire us to help you.
I will continue to share what I know. Why don’t you share, too?
(Cross-posted at foreignbankaccountamnesty.com)
UPDATE 06 October 2009
J. saw my post and emailed me the following:
Had the IRS announced to people like J. that mere paperwork errors would be solved quickly and cleanly without penalties, there would have been less unnecessary suffering on the planet.
It’s beyond that. Plenty of people like me may have been willing to come forward voluntarily, to avoid the possibility of criminal prosecution and pay reasonable or no penalties. How many people do you think are deliberating whether to risk the massive 20% penalty the program promises, versus staying underground and risking criminal charges? If the IRS had stated clearly that the heavy penalties were reserved for actual criminals and tax cheats, they could have shaken out many more of us ignorant or careless nonfilers.