The Treasury Inspector General takes on OVDP. (Don’t get too excited)




I could hardly contain my excitement. Finally, the Treasury Inspector General for Tax Administration (TIGTA) was riding in to give a blistering report on the unfair, onerous slog that is the IRS Offshore Voluntary Disclosure Program (OVDP).


I couldn't wait to sink my teeth in to the report and watch them disembowel the completely onerous and misguided IRS OVDP process. From our experience here at the firm, we know it's a program that was designed to catch 'millions of tax evaders' (that don't exist), but instead impacts millions of regular US expat and dual citizens, and other citizens of the world.


Our clients are expats, dual citizens, international entrepreneurs, and visa holders, out there working hard making the world a better place. Then one day they find they are sitting on a landmine. All because they didn't file some bank form or because they have some taxes the IRS didn't get. Does this sound fair to you? No.


TIGTA are usually the "good guys" (as 'good' as a government agency can get). Their job is to "provide independent oversight of IRS activities. TIGTA promotes the economy, efficiency, and effectiveness in the administration of the internal revenue laws. It is also committed to the prevention and detection of fraud, waste, and abuse within the IRS and related entities." In the past, they have done a decent job at finding IRS issues and calling a spade a spade.


I couldn't wait for them to ask questions like…

  • Why are people with no actual criminal intent getting threatened with FBAR penalties? FBAR penalties were created to stop international terrorists. Clearly TIGTA would lambaste the IRS for not penalizing the criminals, and instead going after regular taxpayers, right?
  • Why are people's life savings at risk simply because they forgot to fill out a form that few at even the IRS know about?
  • Why are IRS employees out to penalize, to the fullest extent, innocent taxpayers who voluntarily come forward?
  • Why is a Holocaust survivor's OVDI from 2009 in which she didn't report $3,000 in interest income still open?
  • Why are so many OVDP submissions completed by incompetent professionals? And are these professionals incompetent, or is the tax code for foreign income insanely complicated?
  • Why does the IRS require people in war-torn areas to be concerned about filing the FBAR? Should we really demand that a bank account holder in Nigeria risk their life — seriously — to get bank account information? Bank account information that may be sold to kidnappers?


Our first warning that this report wasn't a usual TIGTA report

In the first paragraph, we start to get that uh-oh feeling. We found some big errors:


"The United States generally taxes its citizens and resident aliens on their worldwide income."


Remove "generally." Universal taxation means that any dollar a US person makes anywhere in the universe is subject to the tax jurisdiction of the US. Also, just "citizens and resident aliens"? You sure about that? I can think of at least one exception. If a "Green Card" holder leaves the US without a formal surrender of their Green Card, they are still subject to universal taxation. And further, from irs.gov "Under limited circumstances, certain foreign source income is subject to U.S. tax.


The next sentence doesn't get better.


"Some taxpayers use offshore bank/financial accounts to hide assets and income outside the United State in an effort to evade their Federal tax obligations."


Yes "some" people intentionally break laws. The truth is that a majority of people using OVDP did nothing terribly intentionally, but man, are they treated like criminals. Don't believe me? Well, here is a list of  some of the bizarre things that are subject to onerous reporting or IRS taxation:


  • Tax-deferred foreign pension & retirement plans
  • Foreign life insurance (both income & excise taxes!)
  • Foreign inheritances
  • Minority ownership interests in foreign corporation
  • A foreign farm, let's say a vineyard in Italy (even if it loses money)
  • Bank accounts that lose money
  • Bank accounts not under your control
  • Bank accounts of unknown value that exist in war-torn countries
  • A shell corporation used for asset protection that owns, say, a Sea-Doo personal water craft in Costa Rica


TIGTA's latent bias

And the next sentence doesn't get any better in precisely stating facts or the law:


"Taxpayers who intentionally fail to report income earned on offshore accounts or neglect to disclosure foreign assets as required by law face significant penalties and possible criminal prosecution if discovered by the IRS."


But you don't need to do anything intentionally or negligently to be subject to horrific penalties. If you've been paying attention, you know that Jon McBride, one of the first FBAR defendants, never controlled or had access to the money he was accused of not reporting to the IRS. In fact, the money was stolen from him. Yet he was assessed over a million dollars in willful FBAR penalties!


Why not discuss what the purpose of FBAR penalties were? It wasn't to nab taxpayers, but rather, criminal syndicates who were using the international banking system to fund their truly horrific crimes like terrorism, human trafficking, and extortion. Why didn't TIGTA do a little analysis on how many actual criminals have been assessed FBAR penalties? How many terrorists have been busted because of the FBAR? How has the FBAR made our lives better? If not, maybe TIGTA could suggest it needs to get the heave-ho?


Time spent assessing FBAR penalties on terrorists? 0:00:00. Time spent terrorizing taxpayers with horrific FBAR penalties? 12 years.


So, we've established that TIGTA is only looking at OVDP though the eyes of the IRS hammer that sees every taxpayer as a nail. Next, the report moves on to their suggestions.


TIGTA suggestions

First, TIGTA demands the IRS review for audit or criminal investigation all denied or withdrawn offshore voluntary disclosure requests for FBAR penalty or criminal charges. TIGTA has a concern that many who enter the program withdraw and no one is doing anything about it. They think that there are millions of dollars of penalties the IRS won't be able to collect. (Fines, incidentally, that will pay for seconds of federal funding).


We can tell you that a lot of our clients who have either used the IRS authorized delinquent returns process or streamlined program (by the way, thank goodness for the Streamlined Program — we are huge fans; especially of the streamlined program for those who live offshore) had some fact that made them no longer have to use any program.


TIGTA also recommend IRS Criminal Investigation Division (CID) get more involved in withdrawn or denied OVDPs. Think about this — there are about 3,000 tax indictments per year. If IRS CID went after everyone with incorrectly or unfiled FBARs the entire Federal judiciary system would shut down. Perhaps a better idea is to use CID a bit more wisely. There are thousands, maybe hundreds of thousand of people filing fraudulent tax returns to get fraudulent refunds. It seems to me that CID could make good use of their resources by going after those people. After all, there is a difference between stealing money from the government, as opposed to not filing odd strange forms that a tiny percentage of IRS employees know about. Seriously. I dare you.


TIGTA recommends a centralized tracking system and one mailing address. This suggestion we can agree with.


Seriously, TIGTA needs to go back and start looking at this from the eyes of taxpayers. Does this OVDP need to be so harsh? Is this the best use of resources?


What about the compliance costs? Did TIGTA look at the Form 5471 requirements, the one that requires 50+ hours to complete on average per year? Why does the IRS require so much information? What does it do with it? Why is it necessary?


Maybe TIGTA can help give the IRS some much helpful guidance with an OVDP Report 2.0. I'd suggest they call us first (888-727-8796).


If you are having any offshore reporting or FBAR issues, contact us to schedule a free, confidential consultation. Here's a list of offshore issues we can help with.