Expats Protest IRS Treatment of Citizens Overseas

A group of U.S. expatriates has written a letter to IRS Commissioner Doug Shulman to complain he has not responded to a directive from the National Taxpayer Advocate objecting to the way taxpayers who came forward under the 2009 Offshore Voluntary Disclosure Program were treated by IRS examiners.

Last December, National Taxpayer Advocate Nina Olson described her concerns in her annual report to Congress and later sent a rarely used Taxpayer Advocate Directive to Shulman (see Taxpayer Uncertainty Prompts Citizenship Renunciations). Olson, who heads the Taxpayer Advocacy Service, argued that IRS examiners treated some taxpayers unfairly who had come forward under the 2009 program to voluntarily declare previously undisclosed bank accounts to the IRS. She said the IRS had subjected them to a “one size fits all” regime and rescinded some of the claims midstream that would have qualified for reduced penalties by way of “reasonable cause” (see Groundhog Day for IRS Voluntary Disclosure Do-over).

Olson issued a rare Taxpayer Advocate Directive last August, only the sixth in her office's history, according to Tax Notes, to try to force the IRS to change its audit procedures by revoking a memo from last March that directed IRS examiners to stop accepting less than a 20 percent penalty and assume that a violation is not willful unless proven otherwise. IRS Commissioner Doug Shulman has not yet answered her request.

The expatriate group, American Citizens Abroad, has now written to Shulman to express its concern that Shulman has not responded to Olson’s directive. The ACA noted that tax information publisher Tax Analysts has reported that “IRS Commissioner Douglas Shulman has no plans to respond in writing to National Taxpayer Advocate Nina Olson’s Taxpayer Advocate Directive (TAD) on the IRS Offshore Voluntary Disclosure Program (OVDP) despite a statutory requirement that taxpayer advocate recommendations be responded to within 90 days.”

In the TAD and in her report to Congress, Olson said that IRS examiners treated some participants in the 2009 OVDP unfairly, and she ordered several IRS divisions to take various steps to correct this treatment, including allowing taxpayers who had paid penalties under the OVDP to request a reduced penalty. In her report, she used the term “bait and switch” to describe the change in OVDP policy that the IRS implemented a full two years after rolling out the program.

In a Sept. 22, 2011 memorandum after her August TAD, Olson explained why she instructed the IRS to change such practices. In the memo, she noted that “the IRS harmed taxpayers seeking to correct honest mistakes,” and “the IRS retroactively changed the terms of the OVDP” to eliminate the possibility of examiners reducing penalties for overseas filers who had no idea they had to file, the ACA pointed out.

The memo further explains that “the OVDP penalty structure assumes all participants are tax evaders hiding money overseas, when in fact, the IRS steered many people into the program who made honest mistakes.”

Many participants in the OVDP 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 Eritrea, which taxes on the basis of citizenship instead of residence, according to the ACA. In her memorandum, Olson said of the OVDP, “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.”

“By imposing large penalties for a simple filing omission, the IRS has adopted a camouflaged policy of taxing assets of Americans abroad through penalties,” said ACA executive director Marylouise Serrato in a statement.

On the FBAR form, Americans have to declare even accounts over which they have signature authority, but which they do not own. This is particularly damaging to the many American women who are married to non-Americans and living abroad, the ACA noted in its letter to Shulman.

Many expatriates have never worked outside the home, and thus do not owe any taxes, the group argued. Yet to come into the system by filing the necessary FBARs, they will have to declare their foreign husbands’ accounts to the IRS and be subjected to heavy penalties, something their non-U.S. husbands are understandably reluctant to undergo.

In its letter, the ACA asked Shulman to respond immediately to the National Taxpayer Advocate, and to take the measures that Olson suggested in her directive. In addition, the ACA asked for all IRS examiners to be instructed to take into account the individual circumstances of U.S. citizens abroad who were previously unaware they had to file FBARs and who are now afraid to come forward.

“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,” said ACA finance director Anne Hornung-Soukup. “However we also know firsthand 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 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.”

“We also asked Commissioner Shulman, again, two questions which have already been raised in Freedom of Information Act letters sent to the IRS, but which have not been answered,” Hornung-Soukup added. “These questions are, how many of the 33,000 taxpayers who came forward in the OVDP live outside of the United States, and how much of the $ 4.4 billion that was collected under this program comes from fines, and not back taxes?"

The ACA concluded its letter by stating its position that the huge problems for Americans living overseas are essentially due to the U.S. system of citizenship-based taxation. The ACA is strongly encouraging 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.

The full text of the letter and more information on this issue can be found at http://www.americansabroad.org.

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