Taxpayer Advocate Service: Your Voice at the IRS

National Taxpayer Advocate Annual Report to Congress

DRACONIAN OFFSHORE PENALTIES

OFFSHORE DISCLOSURE PROGRAMS DISCOURAGE TAX COMPLIANCE

U.S. law requires citizens and residents to report foreign bank accounts so the government can better detect “bad actors” engaged in tax evasion, terrorism, and money laundering. The IRS launched a series of offshore voluntary disclosure (OVD) programs to settle with taxpayers who had failed to report offshore income and file information returns. The IRS has sought to increase enforcement of Foreign Bank and Financial Accounts (FBAR) reporting requirements in recent years and has offered a series of voluntary disclosure programs designed to settle with taxpayers who had failed to file required FBAR forms. However, the report says, the programs generally applied a “one-size-fits-all” approach that required the payment of significant penalties and did not distinguish between “bad actors” and “benign actors.” These “benign actors” include those who have dual citizenship but have never lived or filed tax returns in the U.S., people who inherited an overseas account or opened one to send money to friends or relatives abroad, refugees or immigrants from totalitarian countries who felt compelled to conceal their assets from the governments they fled, and Holocaust survivors and their children who are frightened that persecution based on national origin could happen again.

The National Taxpayer Advocate also is concerned that the IRS has increased the cost and burden of correcting past violations, increased the burden of reporting foreign accounts in the future, and discontinued programs that provide account holders with information about reporting requirements. The IRS has reduced the burden of correcting errors somewhat. However, the combination of the reporting statute and the way the IRS administers it creates the potential for such draconian penalties that many taxpayers agree to pay unwarranted penalties to avoid the possible risk of having to pay even larger penalties if they opt out of the settlement initiative.

Read the Full Discussion

The IRS should promote voluntary compliance by reducing compliance burdens and expanding its targeted outreach and self-correction options for benign actors.

- Nina Olson, National Taxpayer Advocate

Other Most Serious Problems