Each year, the National Taxpayer Advocate is required to identify at least 20 of the most serious problems affecting taxpayers and report them to Congress, along with recommendations. This year, one of the top problems identified by current Advocate Nina E. Olson was the excessive penalties some taxpayers with offshore bank accounts have encountered when they try to deal with previously unfiled Reports of Foreign Bank and Financial Accounts, or FBARs.
According to Olson, even when their previous non-compliance was not willful, some taxpayers have been hit with penalties so shockingly high they serve as a deterrent to others' compliance. These were not intentional tax evaders, but people who came forward to rectify past errors using the Offshore Voluntary Disclosure Program.
Unfortunately, many who took advantage of the amnesty program actually fared worse than those who opted out. Even worse, the penalties have been disproportionately punitive on those whose offshore balances are lowest.
The IRS is cracking down hard on U.S. taxpayers who intentionally hide taxable assets in offshore accounts. The OVDP is meant to allow people who hadn't intentionally been evading taxes to come clean -- and avoid the massive penalties for failure to file FBARs. With the passage of the Foreign Account Tax Compliance Act, the stakes have gone way up, however, because the IRS has been using the FATCA to pressure foreign banks into revealing the identities of their U.S. account holders.
According to Advocate Olson, however, an internal audit of the IRS's 2009 OVDP revealed something unexpected. Among those with median-level offshore account balances who used that program, the average penalty was about 381 percent of their unpaid taxes and interest. Shockingly, those with balances in the lowest 10 percent paid an average penalty of a whopping 580 percent.
Other taxpayers who wanted to come into compliance "opted out" of the OVDP, instead filing amended returns and FBARs. When the IRS audited them, however, the penalty averaged only 70 percent.
The conclusion here is not that it's better to avoid the IRS's current OVDP. With the FATCA, your offshore account could be revealed to the IRS at any time, exposing you to even more draconian penalties, or even criminal prosecution. The key message is this: you can't afford to enter the Offshore Voluntary Disclosure Program without representation by a lawyer who is extremely well-versed in the program.
Source: Accounting Today, "Taxpayer Advocate Calls for Taxpayer Bill of Rights," Michael Cohn, Jan. 9, 2014