The U.S. Internal Revenue Service’s own internal taxpayer advocate has issued a highly critical report on the tax-collecting agency and specifically cited unfair treatment of overseas taxpayers.
Despite the report, Doug Shulman, IRS commissioner, appears ready to ignore it despite a legal requirement to make a reply.
American Citizens Abroad, a private advocacy organization for Americans living abroad, wrote Shulman Friday and called on him to respond to the advocate’s concerns.
The advocate is Nina Olson, and her agency is an independent entity within the IRS. She went so far as to accuse the tax collectors of engaging in bait and switch with overseas taxpayers.
Ms. Olson delivered her report to the U.S. Congress Dec. 31. Shulman had until the end of January to respond. One of her concerns was how overseas Americans were treated in the 2009 offshore voluntary disclosure program. The title of this section is: “The IRS’s Offshore Voluntary Disclosure Program ‘Bait and Switch’ May undermine Trust for the IRS and Future Compliance,” notes American Citizens Abroad, adding that:
The section on international issues provides the most thorough analysis to-date of the significant issues facing American residents overseas, including:
* the overwhelming complexity and cost of compliance,
* the risk of steep civil and criminal penalties for even inadvertent non-compliance,
* the need for better IRS services for individual U.S. taxpayers living overseas and small businesses involved in international economic activity.
The taxpayer advocate discussed the IRS’s policy change in applying key terms of the Offshore Voluntary Disclosure Program more than a year after the application deadline had passed. The report states that the policy change contravenes the IRS’s written pledge that “under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”
She ordered several IRS divisions to take various steps to correct this treatment, including allowing taxpayers who had paid penalties under the compliance program to request a reduced penalty, noted American Citizens Abroad. The compliance program allowed U.S. Taxpayers who had not followed the rules for filing to do so with reduced penalties.
Said Ms. Olson in her report: While the maximum penalty for a “willful” failure to report foreign accounts on Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (Fbar), is severe, people who voluntarily correct inadvertent violations are generally not subject to a significant penalty. Nonetheless, the IRS “strongly encouraged” nearly everyone with a violation to participate in the 2009 offshore voluntary disclosure program or face potentially excessive civil and criminal penalties. More than a year after the 2009 [Offshore Voluntary Disclosure Program] ended, the IRS changed key terms of the program to the detriment of those with inadvertent violations, damaging the IRS’s credibility. The IRS’s statements also leave the public confused and concerned that excessive Fbar penalties may apply to inadvertent violations.”
“The IRS harmed taxpayers seeking to correct honest mistakes,” she said.
Many participants in the Offshore Voluntary Disclosure Program have been Americans living overseas who had no idea they had to make a tax declaration to the United States, which is the only country in the world (besides renegade
Eritrea) which taxes on the basis of citizenship instead of residence, said American Citizens Abroad.
In her memorandum, Ms. Olson further wrote of the program, “a more effective initiative would have prompted even more taxpayers to come into compliance without leaving those who did come forward feeling terrified, tricked, or cheated,” the organization noted.
Mary Louise Serrato, executive director of American Citizens Abroad who signed the letter to Shulman, said: “By imposing large penalties for a simple filing omission, the IRS has adopted a camouflaged policy of taxing assets of Americans abroad through penalties.” She was quoted in a news release.
Anne Hornung-Soukup, finance director of American Citizens Abroad and the other signer of the letter, said, “Our letter to Commissioner Shulman of the IRS makes it clear that ACA is in full agreement with efforts to find and hold accountable tax evaders. However we also know first hand from our members how devastating the indiscriminate use of penalties under the OVDP has been for many American citizens living outside of the United States. Most of them are not tax cheats; they were sincerely and completely unaware of the Foreign Bank Account Report (Fbar) filing requirement, since it was not enforced until just a few years ago.”
“Many of the U.S. citizens living abroad who entered the OVDP in fact owed no taxes to the United States, since they had paid full taxes in their country of residence. Yet because of not filing their Fbar forms, they faced IRS imposed fines and penalties amounting in some cases to their entire lifetime savings. Many Americans living overseas are now terrified to regularize their status because they’re afraid of being fined huge amounts, even if they owe no taxes.”
American Citizens Abroad wants the U.S. Congress to abandon citizenship-based taxation and to adopt residence-based taxation for individuals at the same time they adopt residence-based taxation for corporations, it said in the release.
The Internal Revenue Service put its own spin in a press release about the report by Ms. Olson. The release emphasized her statement that the IRS is not adequately funded to serve taxpayers and collect taxes.
The release did note that Ms. Olson said the IRS voids taxpayer annual returns without telling them or giving them a chance to respond and also stalls on making large refunds.
The full Taxpayer Advocate report is on the WebHERE!
The IRS reopened the voluntary compliance program for a third year in January. The third offshore effort comes as Shulman also announced that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program, the agency said.
On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program, it added.