Due Diligence

by Brian Mahany

Every year, the National Taxpayer Advocate issues a report to Congress. In it she discusses her own independent findings and makes recommendations on how the agency should be reformed. Although a IRS employee, NTA Nina Olson is really independent of the agency and has the ability to report directly to Congress without first seeking approval of the IRS Commissioner.

The stated mission of the taxpayer Advocate Service is “to help taxpayers resolve problems with the IRS and recommend changes that will prevent the problems.” As part of her duties to recommend changes, Olson issues an annual report to Congress. In this year’s report, she took time to criticize the IRS’ Offshore Voluntary Disclosure Program (“OVDI”).

The Offshore Voluntary Disclosure Program is a tax amnesty for those with unreported foreign accounts. Federal law requires taxpayers that have offshore bank or brokerage accounts to disclose those accounts annually. Taxpayers are required to file a “Report of Foreign Bank and Financial Accounts’, often called an FBAR. Failure to file an FBAR can be a criminal offense punishable by 5 years in prison and often carries huge civil penalties.

According to the taxpayer advocate, the present OVDI program is a “one-size-fits-all” program that unfairly treats all taxpayers the same, regardless of culpability. We agree with her comments.

Very few people we have met have intentionally hid money offshore to avoid taxes. There are some of the proverbial “fat cat” business folks that are actively committing tax evasion by hiding money in Swiss accounts. Most of the folks we help, however, have very legitimate reasons for maintaining an offshore account. Some folks were born in India or Korea and send money home to family there. Some are dual nationals that maintain business interests in foreign countries. Some are Americans who have retired to Mexico or Europe and find it easier to bank where they live.

OVDI is a great deal for the few folks that intentionally evaded taxes. No audit, a reduced monetary penalty and a get-out-of-jail card. For the majority of taxpayers who simply didn’t understand the law or received bad advice from a tax preparer, the program isn’t as sweet.

Why? Because the program really doesn’t differentiate between the two groups. There are some exceptions for people with small accounts and those that inherited accounts but for most taxpayers, there is no difference in the penalty amounts for those who made a mistake and those who intentionally tried to avoid declaring their income and paying taxes.

To be fair, taxpayers who are truly innocent can “opt out” of amnesty and may face no penalties. The problem with an opt out is no guarantees and you will face an audit. Because of the possibility of criminal prosecution – however unlikely – we have some seen some taxpayers pay the 27.5% amnesty penalty and go through the offshore voluntary disclosure program rather than opt out.

Hopefully the IRS or Congress will listen to Olson. We endorse the amnesty plan but agree that it could be made much fairer for the majority of folks who simply made a mistake. Lest you think there are only a few people with unreported accounts, the estimates range from a low of 500,000 to a number in the millions. America is truly a melting pot and we do live in a mobile society.

The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of foreign reporting matters including the offshore voluntary disclosure program, opt outs, FBAR filings, FATCA compliance and foreign gift and corporation returns. In most instances, services can be handled for a reasonable flat fee.

For more information, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and our satellite office in San Francisco, California. Services available worldwide.

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