So said the Big Bad Wolf
I can’t believe it. On January 5, 2012 I wrote a post about OVDI called: The Taxpayer, the IRS and the Cross Border professionals – where to go from here. Six hours ago I finished a lengthy post about OVDI called: Taxpayer Advocate vs. The IRS – It’s a question of trust. I thought I would enter: “OVDI Blog Post Retirement”. My point was that the IRS has a real trust issue. |The “cross-border professionals are not much help either. And then, almost on cue (while I was writing the post) the IRS is at again! To emulate a famous Ronald Reagan quote:
“There he goes again!”
Can you believe it? The IRS has extended OVDI. I think it was Einstein who said that the height of insanity is to continue to repeat the same thing that doesn’t work. Many people don’t understand how they are perceived by others. I would say that Commissioner Shulman qualifies. He doesn’t get it. OVDI has irreparably damaged the trust that the practitioners and the taxpayers have in the IRS. No matter what Mr. Shulman chooses to believe, the IRS cannot function without trust. He is seriously out of touch with reality. OVDI has made people more reluctant to come forward to clean up their problems. Why? Because there is no clear direction from the IRS. All Mr. Shulman seems to be able to say is: come on in to the see the IRS and we will take your life savings. He must be kidding. The rules for OVDI 2011 were long and comprehensive. Very few people understood them completely. But in a nutshell here was the OVDI 2011 offer:
“If you file 8 years of returns, spending a large part of your life doing this and thousands (in many cases tens of thousands of dollars to do this) you will agree to give us 25% of your net worth. Why you ask? Because if you have a foreign bank and/or you live outside the United States you are a criminal – nothing but a common criminal.”
That was the offer of OVDI 2011. And what do get for your U.S. citizenship? Nothing (unless you count the problems).
I suggest that you do three things:
1. Read the IRS announcement;
2. Read the post that I wrote earlier today
3. Read the post written by Roy Berg of Moodys Tax
Although the announcement is short on detail: OVDI continues to be a program that is designed for tax cheats. How do we know that? The complete IRS announcement (with the exception of the second to last paragraph) is premised on finding tax cheats. Once again, you can enter if you want. But, if you enter OVDI the IRS is making it clear that you are considered to be a tax cheat. In my other post, I quoted one lawyer who reinforced the theme that the IRS is wedded to the idea that everybody in OVDI was a tax cheat. This time I am going to quote some more lawyers. How is this for a sample:
“rooted in the DNA of the program, notwithstanding the good faith of the agents and those involved in this process, is the belief that the vast majority of these people were willful
tax cheats,”
“the biggest problem with the administration of the OVDP was the deeply entrenched view of the IRS that the people who entered the program were tax evaders”
“many participants in the OVDP came in expecting fair treatment but were then treated essentially as “wrongdoers who should feel lucky to pay 20 percent of their foreign account as a price to make peace with the Service.”
“We as practitioners also were aware of the drumbeat from the IRS against quiet disclosures or any kind of compliance short of participation in the [OVDP],” he said. “There was some genuine concern among practitioners that advising a client not to participate might be seen by the IRS as a Circular 230 violation — or worse, an obstruction of justice.”
(IRS Circular 230 is a set of rules that that tax professionals are required to follow. This last comment is SHOCKING! I may explore this in another post.)
The glimmer of hope (to the extent that there is one) is the second to last paragraph which reads as follows:
“The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.”
This paragraph does acknowledge that the IRS is aware that there are people who were NOT WILLFUL in not complying with PAST tax and reporting obligations. Roy Berg of Moodys Tax views this as a very positive development. Mr. Berg does see (and I agree) that the second to the last paragraph of the IRS announcement is separate and distinct from the general discussion of OVDI. For those people (and I suggest that if you are U.S. citizen living outside the U.S., you may be one) then OVDI is NOT for you. You have the benefit of the December 7, 2011 IRS FS for U.S. citizens living outside the U.S. and dual citizens. There is no inconsistency or incompatibility between OVDI and the IRS FS. I would point out that:
– OVDI is optional
– the IRS FS of December 7 seems to provide clearer (but still ambiguous) guidance
– in the IRS announcement of January 9, 2012 the IRS does say that further guidance will be coming
In closing, (at least for know), I see that this issue was posted on the Isaac Brock Society site and that the comments indicate there is a great deal of panic. Calm down. This is my attempt at a bit of humor (even though I don’t have a sense of humor). How about this:
We should say a prayer for Doug Shulman tonight. Given his delusional state (OVDI has been a great success, etc.) he is in need of our prayers!
Sleep tight and don’t let the bed bugs bite. I don’t see the continuation of OVDI having much to do with a law abiding U.S. citizen who lives outside the United States! But, the upcoming “procedures” announced by the IRS might.
P.S. A special message for Doug Shulman:
U.S. citizens and dual citizens living outside the United States really do want to come into compliance. We just need clear instructions on how to do this and an assurance that you will not steal all our hard earned retirement funds!
P.P.S. Renounce U.S. Citizenship and Rejoice!
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
Wow, that answers a lot of my questions. We are swimming in very muddy waters here. In all the time I’ve been abroad I have never met anyone who wanted to be non-compliant. They’ve been living abroad for years and never had a clue. And then some wake up and the only option available is so unpalatable and unfair that they are paralyzed with fear. The fallout from the last program was so bad I doubt anyone is going to trust the IRS again.
Aside from that I’m still very worried about the folks who live abroad in small villages and towns (outside of large metropolitan areas). Even with all the publicity over FATCA these folks live in places where there isn’t a lot of international media. Is the IRS going to assume from now on that someone living in a small village in France, Spain or Eastern Europe should have known all this? And these people are not necessarily duals either – you can live quite nicely these days in most countries with a Residency permit. The question I would have is this – does the fact that an American citizen chooses to live in a rural area in another country as a resident alien going to count as “willfull non-compliance”?
I would think that it would be very hard to prove “willful non-compliance” without any knowledge of the requirement. But, the IRS will of course try to impute knowledge to people. The burden of proof is on the IRS when it comes to willfulness. But, even with the “willful penalty” the non-willful penalty can be crippling.
This whole thing is absurd. People simply want to come into compliance. It’s just that the IRS won’t let them without the threat of huge fines. Hence, the result of OVDI is that people are less willing to come into compliance than they would have been.
Furthermore, the effect of people being too scared to come into compliance is that they remain outside the U.S. tax system which is contrary to one of Shulman’s stated goals of:
Bring people back into the tax system.
A final thought on this: I think that it was unbelievably stupid to include the second to last paragraph in a memo about tax cheats. These issues should be separated by separate memos.
It may be too late. The pace of renunciations will accelerate.