David Voreacos has written an article hailing the success of the IRS’s charges against banks like UBS (which has made it nearly impossible for expats living in Switzerland to find banks willing accept them as customers).
The IRS has said 30,000 U.S. taxpayers with offshore accounts avoided prosecution since 2009 by entering a limited amnesty program, paying back taxes and saying who helped them hide their accounts from authorities.
Marylouise Serrato, Executive Director of American Citizens Abroad, has written a letter in reply (shared with me via e-mail):
We at ACA have read with great interest your October 12, 2011, Business Week article “Offshore Tax Scorecard, UBS, Credit Suisse, HSBC, Julius Baer.” What your report failed to note is that for every “big ticket” criminal tax evader caught in the IRS dragnet, hundreds and perhaps thousands of innocent, law-abiding U.S. citizens were racked up as collateral damage. Many have been reduced to destitution or have regrettably decided that they cannot ever risk returning to the U.S. – all because of a past filing error due to ignorance or oversight. The real story here, Mr.Voreacos, is not the cases the IRS wishes to publicize, but the tragic and avoidable anguish visited upon overseas Americans by their own government, for no discernible reason.
These people have also been depicted as IRS “success” stories in tackling criminal tax evaders but in fact they represent a very different profile than those highlighted in your recent article. For a fair reporting of the problem you need to provide your readers with a balanced narrative of what the OVD programs have really wrought in terms of grief, harassment and legal jeopardy for persons who have in many cases complied with the law to the best of their knowledge and ability. What follows are examples from the 130+ testimonials ACA has received attesting to overseas American problems due to tax compliance, FBAR and FATCA.
Due to misinformation and our lack of understanding- we failed to file our returns in the USA after 2002. We mistakenly believed that due to the high level of taxation in the country of our permanent residency- it was not necessary to file tax returns in the USA as we had no property or income in the USA. We were contacted by the IRS in 2009 and under terrible threat of huge fines for “failure to report” entered into the OVDP program. The process has cost us greatly — both emotionally and financially. Our marriage has come under enormous strain. We do not fall into the category of “criminals.” We were just trying to live our lives doing our best to raise our family.
My wife is an American citizen, I am French citizen, we have been living and both working in France for nearly 20 year and have paid all our taxes in France. Recently we were made aware of my wife’s U.S. filing obligations and were advised by a U.S. accountant to back file and comply with U.S. tax policy and enter OVDP. We now owe more than $70,000 in back taxes and penalties on income generated in France. However we have now also been told about the FBAR requirements and are being assessed additional penalties due to failure to file. After working very hard in France to build some savings, what a surprise to have the IRS tell us that they are doing my wife a sort of “favor” and agreeing not to press criminal charges in return for seizing 20% of her savings. This voluntary disclosure program should apply only to “real” tax evader (US resident hiding their assets to avoid tax). It is a terrible and vicious trap for the millions of Americans that live abroad on a long term basis. This program and act is not a correct and descent way to help Americans get back in the US system.
My client just finished the first round of voluntary disclosure. He had a six figure salary for the last eight years. He had reported all his income in the US or his country of employment but did not file FBARs and had inadvertently left some income un-reported in the US. He re-filed back tax returns and ended up owning under $10,000 extra in taxes. Total legal bills over $50,000 and FBAR penalties in excess of $250,000. These fines are totally out of proportion to the errors that were made.
I am American who has worked overseas for a good part of my career. Due to my job I held financial accounts overseas and most all of the income with respect to my foreign accounts was disclosed on my 1040s. However, in a review conducted by my accountant it was discovered that not all of the income was reported correctly nor were FBARs filed. I entered voluntary disclosure program to correct the past filings. After spending over $50K in professional and legal fees, the latent FBARs have been filed my tax returns amended. The net impact of the changes is that I am now due a refund of under 500 from the IRS and my adjusted gross income over the past six years changed by less than 1% — almost zero. However, the IRS is deeming my failure to file the as “willful” and either I am subject to penalties which could range from $1 to$5 million.
ACA testimonials are not the only ones telling this story. If you visit the website of the International tax lawyer Phil Hodgen, you will see stories from a plethora of individuals who have experienced the same or worse treatment with OVDP, with penalty application in complete disproportion to the filing errors made, and no consideration given to the absence of willful behavior.
The crisis is also substantiated by The Taxpayer Advocate’s (TAS) report issued this past June, 2011 highlighting some of the dubious tactics used by the IRS in the OVD programs. In its “Report to Congress on Fiscal Year 2012 Objectives” they noted, “IRS’s inconsistency and failure to follow its published guidance damaged its credibility with practitioners involved in Voluntary Overseas Disclosure Program and could be subject to legal challenge.”
I look forward to speaking with you regarding the possible publication of a supplemental article to complement the one published, and ACA stands ready to provide you with whatever background material you may require in this endeavor.
Executive Director ACA