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National Taxpayer Advocate Lambasts IRS’s OVDP Programs And FBAR Penalties

Here ye, here ye! National Taxpayer Advocate, Nina Olson recently gave her annual report to Congress. And she didn’t mince words. She lambasted the IRS for relentlessly asserting onerous offshore penalties including its disproportionate treatment of non-willful taxpayers caught in the labyrinth of foreign asset reporting. Ms. Olson’s report asks the IRS to change its ways and to end the practice of branding every taxpayer who happens to have an offshore account with the letter “C” for “criminal.” Indeed, this is not the year 1652 and not every taxpayer who has an offshore account is the modern-day equivalent of Hester Prynne, the young woman found guilty of adultery in “The Scarlet Letter” and forced to wear a scarlet “A” (“A” was the symbol of adultery) on her dress to shame her.

Ms. Olson states that not only must the IRS change its ways, but Congress must act. In a powerful call to action, Ms. Olson demanded that Congress enact legislation that mitigates disproportionate FBAR penalties. Singling out the Offshore Voluntary Disclosure Program (“OVDP” for short) for ridicule, Ms. Olson argued that it isn’t fair, since it saddles innocent taxpayers with penalties “equal to over eight times the unreported tax, and over ten times the 75% penalty for civil tax fraud.” That makes no sense, she says.

Even worse is the fact that those who decided to “fly solo,” opting to navigate the choppy seas of foreign asset reporting alone rather than with a tax professional, generally paid the most. But that’s not all. Those taxpayers who previously entered one of the IRS’s amnesty programs – and who, by doing so, demonstrated a willingness to “get right” with Uncle Sam from the very beginning – are now worse off than those who sat on the fence and did nothing, waiting to see which direction the wind was blowing.

When news broke that the IRS had expanded its streamlined program, these “Johnny-Come-Latelies” pounced on the streamlined program faster than Tom pouncing on Jerry in the looney-tunes sitcom, “Tom & Jerry.” And who could blame them? A far smaller offshore penalty (streamlined domestic) or no penalty at all (streamlined foreign) was hard to resist compared to the existing 27.5% offshore penalty under OVDP. These taxpayers knew a good thing when they saw it.

Unfortunately, those who obediently answered, “Aye aye sir” when the IRS came calling learned a hard, yet valuable lesson. While the conventional wisdom was that they would be the first group of taxpayers to benefit from the recent changes, just the opposite was true.

Most were denied the opportunity to benefit from the recent changes, for one of two reasons: first, by virtue of having already signed a closing agreement. Or second, by failing to satisfy the requirements for transitional treatment from OVDP to streamlined. To say that they were treated like “deckhands” would be an understatement. As Ms. Olson stated, this was “not fair.”

Ms. Olson did not stop there. Taking aim at the IRS’s FAQs, she criticized them on the grounds that they had a hollow ring, because they were “not explained, appealable, or published.” In other words, the rights they claimed to bestow upon taxpayers were illusory. And this has the effect of eroding public confidence by creating the perception – whether it is true or not – that the IRS will not be fair in a “post-opt-out examination.”

Ms. Olson argues that the IRS has gone far astray of its core principles, the virtues of which it extols in its “Taxpayer Bill of Rights.” The latter enumerates the fundamental rights afforded taxpayers, including: (1) the right to pay no more than the correct amount of tax; (2) the right to challenge the IRS’s position and be heard; (3) the right to appeal an IRS decision in an independent forum; and (4) the right to a fair and just tax system.

In an article entitled, “National Taxpayer Advocate Slams IRS Offshore Programs & FBAR Penalties, Demands Change,” author Robert Wood shines a bright light on an inconvenient truth by posing a profound question, “Are those true, real rights? Where are they?”

Mr. Wood so eloquently states (as only Mr. Wood can) that “the IRS should allow taxpayers to discuss IRS interpretations and to appeal the interpretations; and allow taxpayers to amend closing agreements to benefit from recent program changes.” I couldn’t agree more.

Onerous civil FBAR penalties did not escape Nina’s scathing criticism. She called for Congress to cap them and to lower them significantly. In so doing, she introduced a “novel” concept, which can be paraphrased as follows: If the account is located in the same country where the taxpayer lives, then how can it be a foreign account? And if it’s not a foreign account, then the taxpayer shouldn’t be forced to pay a penalty for failing to report it.

Even where an FBAR penalty is appropriate, Ms. Olson argues that it should be “waived” if there is no evidence to suggest that the account was used in the commission of a crime. In cases of alleged willful FBAR violations, the IRS should have to prove willfulness, long before it is hauled into court by a disgruntled taxpayer who has the determination, the will, the resolve – and yes, the money – to challenge the assertion. The current practice, however, allows the IRS to assert the willful FBAR penalty arbitrarily for any reason whatsoever – even for something as benign as not liking the color of your shoes.

Ms. Olson has made a proposal to increase the FBAR filing threshold from $ 10,000 (US) to $ 50,000 (US). If the $ 50,000 threshold sounds familiar, that’s because it is the threshold for Form 8938. Thus, increasing the FBAR filing threshold to $ 50,000 would make the reporting thresholds for FBARs and Form 8938’s uniform and consistent.

Lastly, in response to the overwhelming frustration experienced by taxpayers who have toiled endlessly trying to distinguish between FBARs and Form 8938’s, and then whether the Form 8938 applied to them, Ms. Olson proposed combining the two forms into one.

Certainly, Ms. Olson’s annual report was a breath of fresh air. Let’s just hope that it doesn’t fall on death ears.

For the text of the report’s Executive Summary: 2014 Annual Report to Congress. If you want the full text, it is here: Complete Report: 2014 Annual Report to Congress.

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Original Post By:  Michael DeBlis


As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


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