Letters to Douglas Shulman, or a case study of OVDP communication attempts with the IRS

Just Me explains more about his experience as a 2009 OVDP victim, including his letters to the IRS Commissioner, Douglas Shulman and the entire OVDP correspondence file.  Updated March 19, 2012

This will be a lengthy post, as it includes 2 letters to IRS Commissioner Douglas Shulman followed by my entire IRS communication file. I apologize in advance for such a long posting, and you have my permission not to read all of it it! 🙂

I am prompted to share these letters, after hearing the 30 year IRS Vet say… “The IRS does read these comments and each one is carefully considered. I can assure you that simply by the volume of your comments, you will be heard.”

I have been thinking about doing this for sometime, but his comment has stirred me to do it sooner, rather than later.

Communication or feedback to a huge bureaucracy always, on the face of it, seems fruitless. What’s the point, you might ask? What is the chance that you will be heard, or that someone will act on what you say? Frankly, even now, after all my efforts, I do not have the answer to those questions, but I do know that without it, nothing will happen. So, with this post, I am going to focus on my past idealistic communication efforts to Commissioner Shulman.

One is my original letter to the Commissioner immediately after joining the 2009 OVDP.

Two is my final letter to him when I was facing an unknown OVDP outcome and no relief was in sight. I had not yet appealed to the Tax Advocate Service (TAS).

I will let you read these letters, look over my attempts to communication through out the OVDP, and you can judge for yourself if I was heard or if my comments were “carefully considered”.

Also, this might give you a deeper understanding of the process one goes through when they “Voluntarily Disclose.” While life does go on after the trauma of the experience, and you may find some positive aspects later, while you are going through it, it is hell. The expense in life credit units (LCUs) is never tallied on any reconciliation spreadsheet! 😦

Note: I don’t expect very many of you will want to read everything here. I am putting it up on the blog for a historical reference. Consider it a case study of a OVDP participant. Only the most nerdy amongst you will have the staying power to read the whole thing. I may add more letters of communication later, as these 2 are just the tip of the iceberg. If I do, I will put a note here to point a person to the additional information.

The important thing to acknowledge at the outset is that these letters to Commissioner Shulman did generate a response from the IRS. None of the responses came under Shulman’s name, so not sure he ever saw them. However, in the respect that I got an answer you can say they listened and did respond. Were my pleas “carefully considered”? I am not for sure. I would tend to think not, judging by the outcome. However, without this effort, I may not have generated the attention of the TAS that I did. The TAS is an office inside of the IRS, so in that regard, someone did listen. Now will the Commissioner listen to Nina Olson’s Tax Advocacy Directive (TAD), or her report to Congress any more than they listened to me? The jury is still out.  (post script… No, Shulman never responded officially to the TAD.)

Bottom-line, I do think the exercise was worth the effort, if for no other reason then to demonstrate my good faith efforts to be compliant with laws now discovered, and to communicate the fears I had about the unintended consequences of the OVDP program. I would encourage you to take the time to communicate in written letter form also. Realistically, you may never really know what they will ‘take on board’ from your letter, or what they will just ignore. But even if they ignore it, you have to do it, in my opinion. You must make a record of your concerns and protest. In this I join with 30 year IRS veteran to encourage you to write the Commissioner, although I understand that those struggling with the decision on what to do now, and who have not yet done their OVDI Drudgery assignment might be reticent to write.

At the time of my writing, I was ‘all in’, so to speak. I had nothing else to lose, or so I thought! Little did I know what lay ahead in the agony of the process, lack of discretion that would hamstring reasonableness, and the surprise penalty assertion that came later as a ‘kick in the gut’ that just stunned me.

So, if you are all ready in the OVDI, use whatever ideas you want from my letters to construct your own to the Commissioner. If you are not residing in American and accidental US citizen or dual citizen and you are not going to comply with FBAR and income tax reporting requirements; or if you are an immigrant now leaving the country and your Green Card behind; or if you are in the process of relinquishment or renouncing of your US citizenship and you feel safe enough in your decision, you definitely need to write the Commissioner in addition to posting your story on this blog. If you are in or were in one of the VD programs, you definitely need to write. He needs to hear directly from you about the impact his broad brush jihad is having on you personally. It would be nice if he read comments online, but I doubt he will be reading the Isaac Brock blog.

One thing my experience confirms, a letter sent to his office does get read somewhere in the IRS upper/middle management ranks. There are humans there, with feelings, and have real blood traversing their veins just like us. They are not monsters. They might be out of touch, or operate in a technocrats bubble that you and I don’t relate to. However, I cannot characterize them with the same broad brush generalities that their programs and press releases have characterized us. They might even empathize with the impacts this program has had on your life once they become aware of them. Those feelings might actually become part of some executive summary that is prepared for Shulman about the letters that have come in. It might be discussed in a staff meeting on the unintended impacts of their program. He, like Obama, may actually select a few letters to read personally, and maybe it will be yours! Your unique persuasion or point of view could be the one that alters the course of this gigantic misguided bureaucratic ship! You just never know. Nothing ventured, nothing gained!

First Letter response and outcome:

My first Shulman letter was responded to by letter about 6 months later. It came from Kevin McCarthy, The Acting Director, Fraud/BSA Small Business/Self-Employed Division, Department of Treasury, IRS. It was an unsatisfactory reply, but I wrote back with respectful appreciation of the response and consideration.

In his letter, Kevin acknowledged my letter to the Commissioner, apologized for the tardy response, restated the FAQs of the program including the infamous FAQ 35, and restated assertions about the uniform penalty structure designed for predictability and consistency. Further, he said I could reject the 20% penalty and go a standard audit route with implications that this would be much more severe. (No procedures on how to do this were provided until June 1, 2011.) He concluded that no provisions were being made inside the OVDP for two-track process for Minnows, so to speak. Only outside the program where heavier civil penalties and criminal prosecution can occur was this even considered. The message was clear. Stay in the program!

Second letter response and outcome:

The response to my second letter to Shulman came via email from a Kurt E Branning, Territory Manager SB/SE Exam Western Area and after I had already appealed to TAS. It basically acknowledged my letter to Commissioner Shulman, told me to make a FAQ 35 appeal via the TAS, and if examination did not produce a different penalty option then I should Opt Out. At this time there were only rumors of one Opt Out to date. Neither my examiner or her manager knew what that outcome was or what to expect out of the new Opt Out procedures just released. There was no other anecdotal evidence of how the process was preceding. It is only recently that Moby and Sally have reported back on their Opt Outs. Those are the only two I have seen. The results are encouraging.

Impact of letters combined:

In the end, it was the first letter response by Kevin McCarthy which ended up being my ticket out of OVDP hell. It was on the basis of his restating FAQ 35 that allowed Kurt Branning, to instruct the examination department to allow the consideration of a lower penalty structure using FAQ 35 guidelines.

It is important to note, that this instruction came only after the TAS had agreed to take my case. It was then that Kurt decided to allow that relief under FAQ 35 retroactively. At the time of the TAS appeal, FAQ 35 had been rescinded and examiners were not allowed to use it. The letter rescinding FAQ 35 was still secret and not published. At the time my examiner was unable to produce the guidance in writing, much to my frustration as well as the TAS. She could only tell me verbally what it said. She could only say that my application for FAQ 35 consideration was rejected. No penalty discretion was to be allowed!

Did Shulman have any knowledge of my letters?

Unknown. I have no assurance that Commissioner Shulman ever saw my letters or really considered them. Also, I do not know, if the actual decision makers that sat around a conference table somewhere in DC and came up with the OVDP program in the first place ever considered what I had to say.

A “why did I join?” preface to the letter contents:

I have been asked many times why did I join the OVDP? Knowing what I know now, would I do it again? What would I recommend people to do now? I have answered this before elsewhere, and again can only speak to my flawed thinking about process at the time. My information was limited when I made the decision, and I might do it differently today? Not sure. Maybe my decision process bears repeating here. I am not saying it should be followed or providing advice on what one should do.

Rightfully or wrongly, I came to the conclusion that joining the OVDP was my only option. My logic was probably flawed, but it went like this…

When I first became aware of my non compliance and that there was this program designed for Whales, I began to view it as the IRS fisherman encircling me with his seine net. It never occurred to me prior to then, that I was a fish to be caught. I had naively never thought about offshore accounts as something that I needed to report. Stupid me!

I had a hard time getting my Aussie wife to understand that this program (net) that the IRS marketed via NPR for rich evading Whales hiding funds in secret offshore accounts was encompassing us too. Frankly she was dismissive of the NPR story we heard as having no bearing on us. However, we did have so-called ‘offshore’ accounts in NZ where we were residing. She did have an account in Australia. The net was not just for the rich Whales. It was drawing around us too, and we had to take notice. Reluctantly she began to understand that the US treats her differently than Australia does.

While I suppose I could have just ignored my new-found knowledge and pretended I hadn’t heard the story. I could have taken evasive action and dived deeper to escape the net through the hole in the bottom by doing either nothing except becoming compliant from the date of my knowledge forward. I could have done a Quiet Disclosure (QD) to clean up past sins in spite of the warnings by the IRS not to do that. However, any escape attempt now, it seemed to me, was a willful decision brought on by the presence of the net as cast. I feared that doing anything but entering the OVDP could come back against me in future arguments in an audit were I discovered via a QD (diving deep) or by sudden filings of FBARs, those heretofore unknown administrative form from Hell.

Maybe I was too passive in allowing myself to be netted. Maybe I was too fearful and risk averse. I like to think I was just a good citizen that wants to be compliant with laws and regulations, no matter how ill logical or egregious they seem to be. I should have noticed the IRS vessel on the horizon long before the net was set and swam clear to safer harbors. However, I began to recognize that this IRS fisherman has other fishing skills and other nets to come, (as shown by FATCA which came later), and with the Big Criminal Harpoon it was swinging around as its marketing tool of choice to threaten everyone into the net, I figured I had to join.

Months later, my examiner tried to tell me that I didn’t have to join. It was voluntary decision on my part, so I must be a criminal, so to speak. “Just pay up and quit protesting” was the basic message, as there was nothing she could do. My response was an emphatic “Bull S…. this is not voluntary!”. Just because you put ‘voluntary’ in the title, doesn’t make it voluntary. That is like calling deregulation of the coal industry a “Clean Air Act.” Sure, I voluntarily decide daily not to kill the annoying kids doing wheelies out front in the gravel turnout, but that voluntary decision is very much coerced by the penalties for disobeying the “Do not Kill” statutes to say nothing about the moral strictures of society and Ten Commandments. I know it is a bit of convoluted logic, but that was how I saw it at the time.

Prior to that moment I heard about the IRS program during the family visit back to the Seattle area, I didn’t know that a FBAR existed or understand foreign income reporting requirements. Those considerations never enter your mind when you are sailing the Pacific in a small yacht, or gardening in NZ. Maybe that represented some due diligence failure on my part for not staying fully aware of all the complex tax rules and reporting requirements even for my simple existence. I had never visited the IRS.gov web site in my life.

From that moment in late September, 2009, until I submitted my letter in October 12th there was a very stressed and compressed journey. First I had to convince my wife this was something that we could not ignore and had to do. There was the scramble for knowledge. I had to search out attorneys, and CPAs for a cram course of discovery of what my obligations were. There were returns to amend, and the almost unfathomable foreign tax credit form 1116 to complete that the CPA couldn’t even do correctly. There was a long distance bank record compilation effort that was extremely difficult to do in the time frame I had. There was the embarrassment of your predicament which meant you didn’t want family and friends to know. Then came the very hard, emotional and lonely decision which ended with you walking into the Seattle IRS Criminal Investigation (CI) division offices feeling like a criminal. I did all that, because I had reluctantly came to the conclusion, that once I was aware of my failures and aware of the IRS program, I had knowledge and could not escape it.

I KNEW! Therefore, now, I had to do the right thing.

At that point, I had to decide if I was going to cross the line into willful behavior (ie dive deep) or enter the front door of disclosure. QDs which seemed the reasonable and logical thing to do for any other homeland tax failure like Geithners, were ruled out by IRS language. Offshore account failure was being treated more harshly and differently than any other category of tax failure. By any rationale reading of the FAQs you knew they were strongly discouraging it with implied criminal prosecution threats.

So, what was the choice given my knowledge? To me, None! I had to enter the OVDP. My big mistake was assuming that the IRS would realize that I was a Minnow and not subject me to the harsh 20% penalties. I naively thought my appeals to Shulman would result in logic and reason prevailing. They would do the right thing, and not treat me as a Whale. How wrong I was!!

In the end, it was the “discretion” implications of FAQ 35 that finally got me some relief with the much appreciated help of the TAS. It took 26 months from entry in the OVDP to 906 closing agreement signatures. Without the TAS, I was fish fertilizer!

I fully understand that other Minnows in similar circumstance saw the issues differently than me, and made other decisions. Today many more are struggling with the OVDI decision, as they are just now becoming aware of FBARs and this offshore jihad. If they make decisions different from mine, I can not fault them. If they go the QD route, or decide just to be compliant from now onward, I hope the IRS just leaves them well enough alone. It is a total waste of limited IRS resources that rightfully should be targeted at Homeland residing Whales engaged in actual tax evasion.

Ok… End of preface. Sorry I am so wordy.

Now, here are my letters. You can read them for yourself to see if Shulman was listening and if my comments were “carefully considered’.

First Letter to Commissioner Douglas Shulman-October 18, 2009

Dear Commissioner Shulman,

This letter is a plea for reconsideration of Voluntary Disclosure penalties for “some holders” of overseas bank accounts.

We are writing to you as a mixed nationality couple, married for 30 years and from the Washington State area. We have spent extended periods of time outside the US for much of the last 20 years, and now have a home in New Zealand. Marvin is a US citizen, and Sue is an Australian with US green card.

At the outset, let us state that we can understand and support the efforts that are being directed against deliberate tax evasion by those using the secrecy laws of certain countries banks to shelter funds in so-called “hidden offshore accounts.”

This letter is not about them, or a defense of their evasion. This letter constitutes a plea for fairness for a much larger class of non compliant with much less sinister failures. These are more average US persons, like us, who in all likely hood, didn’t realize these rules applied to them.

We are asking you re-consider the severity of the penalties for ordinary Americans of modest means like expatriates, resident aliens, and immigrants who prior to this time have been generally unaware of the FBAR and income tax requirements for normal and mundane overseas bank accounts like checking and savings. At the very worst, they have been benignly negligent non compliant rather than overt evaders looking for tax shelters. In spite of IRS publicity efforts, the story has been mis-characterized by the media. Millions are still unaware of the requirements to disclose.

Yes, millions, and I think you know that to be true.

These are not the high roller rich that are overtly hiding money in secret offshore Swiss Bank accounts that the press is talking about and focused on. That story line did not resonant with average folks. It did not raise much awareness of the larger story. These were efforts directed at even ordinary folks who have ordinary, non sophisticated banking in their home countries.

It is only by luck or fate during a recent visit back to the States that we heard the story September 22nd on the radio. It was a painful discovery process that brought us to the understanding that this wasn’t just about the Rich. We almost wished we hadn’t heard it. We are now dealing with what we think are the severe, and unintended consequences of our voluntary actions to do what is right. It has been a highly stressful 3 weeks sorting it all out.

We are now one couple of a very select minority that came to realize that this was a story of millions of average US persons being caught up in a regulatory process they don’t understand or realize applies to them.

Arguably yes, they/we should have been aware, but for multiple reasons didn’t or still don’t understand. There are some real “Questions” in these requirements that don’t make logical and rationale sense to average the US person (IRS Technical definition), let alone immigrants and resident aliens of which my wife is one.

The Voluntary Disclosure process was designed for so-called “Offshore tax shelters”, and for those that didn’t disclose, the door has just closed on October 15th. Very few in the larger category we are referring to have come into the fold either because of fear and intimidation of the process and penalties, or general lack of understanding that yes, these rules apply for all overseas accounts, not just the Rich using hidden accounts in countries with secrecy laws.

You are recently quoted as saying “7,500 have come forward.” I assume this adds to the 345,000 that Senator Levin said had complied in 2008. If you compare this total number to the pool of millions who should have declared, the compliance rate is running in the low single digits (<3% by my math). That 7,500 must not give you comfort as to the success that is being publicly trumpeted.

What about the 6.6 million expatriates the State Department thinks they are. They probably all have normal overseas banking arrangements. It is what normal people do. Do you think they should have all understood and come into the fold by now? 7,500 applications for current VDP implies that they don’t, and it appears that you are well short of a reasonable compliance goal on that number alone.

…and I haven’t even mentioned the 37.5 million immigrants and or resident/work visa holders that may have bank accounts in their home countries.

Those, that have declared, like us, have joined a very self selected minority that are now facing some pretty draconian penalties that were certainly designed for the Big Tax Evaders. Surely it did not envision ordinary folks being caught in this net cast by the IRS.

These penalties are too severe for the alleged crimes of ignorance, benign negligence or omission.

Our plea is NOT to make exceptions for us in the FBAR or income tax rules, although we do think the whole program should be resigned and updated for a financially connected and flat world. In 1970, having overseas accounts was exotic. Today, I reckon it is pretty mundane and mainstream.

We plea with you instead to just consider a two tier penalty process that better accounts for those overtly evading taxes using banks with secrecy protection versus just benign negligence or omission by ordinary folks. I would think that the majority of the non compliant are in the latter group of modest means. They really are not the high rolling overt offenders that you were originally targeting.

We now understand the errors of our ways. We now understand the need to clean up our past. We will pay past taxes due, and file forms as required going forward. We will never be non compliant again! Fear has been instilled, and a big lesson has been learned. It is a very painful one emotionally, financially and in hours devoted to make everything right. It is especially hard on my green card-carrying Australian wife.

To hit us with a 20% penalty on aggregated high account amounts for 2003-2008 on top of interest and 20% tax penalty from 6 years of amended returns is a LOT OF MONEY, and it feels like it is being openly taken from us unnecessarily and unfairly.

My Australian wife says, “It is like England sending convicts to Australia for stealing a loaf of bread!” These extra penalties are over-the-top retribution, in our opinion, and not commensurate with the nature of the failure.

In this regard the IRS is using a hammer to kill fleas.

For many of us otherwise law-abiding ordinary people, the embarrassment of not understanding what we needed to do or benignly overlooking some rule that didn’t seem important or relevant; the extreme anxiety, fear, and hassle of the past few weeks trying to gather together all the required information; the cost of hiring CPAs, Attorneys and amending the necessary returns; the cost of paying back taxes, plus interest, plus normal penalties; and the threats of prosecution and imprisonment is severe enough of a lesson without piling on more!

Please! With this letter we are just asking for some empathy, understanding, and reconsideration of the negative impact of this process on us ordinary people.

Currently, we are living in fear of the coming financial impact for doing what is right, and voluntarily declaring our errors. The financial pain inflicted will be severe!

Thank you for your kind consideration of this plea. You hold the power for compassion and can modify the application of penalties. We hope you can find it in your heart to apply some discretion.

Sincerely yours,


Honorable Senator Levins

Honorable Senator Baucaus

Honorable Senator Patty Murry

Honorable Senator Maria Cantwell

Honorable Representative Rick Larson

Secretary of Treasury Tim Geithner

Honorable Representative Charlie Rangel

My second letter to Shulman came at the end of the process some 21 months later. I was struggling to get someone to apply some discretion, and Opting Out was still a BIG unknown. The main plea of the letter was 3 pages, but it is actually much longer with all the all the documentation and summary statements I provided for all the attachments I included. It made for a thick file. I wanted someone to see all the excruciating detail a Minnow was put through by outlining each and every letter and contact I had with the IRS. I just am putting this up here, for those IRS nerds to see the efforts at communication I made, all of which, inside the OVDP, were to naught.

Second  Letter to Commissioner Douglas Shulman-June 29, 2011, 

Dear Commissioner Shulman,

I am writing you as a follow-up to my letter dated October 18, 2009. It was written a few days after I had applied for entrance into the 2009 OVDP. (Exhibit B is enclosed for reference.) At that time, I was hoping for reconsideration of the onerous penalty structure that was being applied. Now, 21 months later, that process is still incomplete, and I want to express my experience, frustrations and suggestions related to the program.

I know you can not personally read all letters that you receive from tax payers. However, I hope someone will review my file as case study of a program with good intentions, run amuck, and arriving at ridiculous outcomes. I will try to brief in summary (3 pages max), as much of a struggle as it is. However, I will attach the entire history that maybe someone will review, please!

Current Situation: After a long distance drawn out process, via mail and phone calls to and from New Zealand (no email allowed), I am now in the 20 day countdown (12 days left) to decide to “Opt Out”, or be thrown out of the OVDP into an “irrevocable” program of great uncertainty.

My current 906 settlement statement calls for an OVDP penalty of ~$172,000 for a tax failure of <$21,000 over a 6 year period. The taxes have been paid in full with interest and penalty.

We were not the target client of the OVDP program, as we have repeatedly pointed out. We were not deliberately moving ill-gotten gains or unreported income to foreign accounts for the purpose of hiding funds in secret Swiss UBS like accounts out of reach of the IRS.

Instead we were just simple expats and immigrants who are not financially sophisticated and weren’t aware of the rules. I understand the IRS position, that arguably, we should have been. That is your world. You are the technocrats that live your lives immersed in rules and regs at IRS.gov. We do not. We were living plain vanilla non extravagant lives in semi-retirement in New Zealand, which is not exactly a banking haven for tax cheats as there are no bank secrecy laws. We were negligent, maybe, but not criminal and never heard of a FBAR prior to September 2009.

Now setting aside any technical or legalese considerations of willful vs non willful, or reasonable cause vs just plain negligence, does the amount of $172,000 seem like a reasonable penalty for a tax failure less than $21,000 that was voluntarily disclosed and paid? Really?

The reason my OVDP penalty seems extreme as compared to the tax errors is technical. The rules of the program allowed (actually required) the “Technical Adviser”, who has no discretion, to include my retirement home, where I am living, in the highest gross aggregate calculation! Why? Because it generated some non substantive holiday rental income in 2003, 2004, 2005, so it is included. If there had been no income, it was not included. There are no de minimis rules, or intent of ownership. If there is $1 of income, it is included. End of Story! Black and white! No Discretion!!

It is the total removal of discretion in the OVDP or ability to make reasonable determinations if results come out as absurd, as in our penalties, which is the major fault of the program, I think.

I understand the IRS goals as stated in the 2009 OVDP was a “uniform and coordinated approach which was designed to make exposure to civil penalties more predictable and offer uniform penalty structure.” However, at the end of the process, prior to issuing a 906 is where discretion could and should have been applied. That would have assured that someone, somewhere did the “penalty reasonability test” as related to the compliance objective that is so much part of the letter and spirit of IRM

What the IRS is doing with the application of OVDP penalties, such as in our case, seems just punitive in application, confiscatory in practice, and not positively corrective in its compliance objective.

The IRS, to its credit, has attempted to modify the OVDP program since I first wrote you in 2009 with my concerns about the misdirected efforts. There are new provisions in the 2011 OVDI that attempts to eliminate some sinners from the egregious penalty structure. I think that you have realized your OVDP was bringing in a lot of small fish which were not the target of the program in the first place. That is why I was asking for relief back then, as that is what I feared.

However, the approach of using additional technical adjustments still doesn’t address the core problem of lack of discretion somewhere, anywhere in the process. It is just adding some pretty arbitrary thresholds to re-define the penalty application. It doesn’t work!

Case in point: The new 2011 OVDI has provisions for 5% or 12.5% penalties for lesser amounts, or new thresholds like < $10K income earned in US, or < $75K in overseas accounts to apply different penalty levels. That seems better, but again, that leaves it to a “Technical Advisor” to apply a ‘non thinking’ approach to penalty application. If it is less than $75K, one penalty applies, but heaven help you if it is one dollar over $75K, full-blown penalty applies. No discretion! Black and White!

A home value is brought into the penalty structure for calculating a high aggregate amount even though it wasn’t an account the FBAR penalties are supposed to be all about. If there is even the most minor or non substantive income, it is included. $1 dollar of rental income or $100,000 of rental income, it doesn’t matter. Black and White! No discretion allowed! End of discussion!

You know, I was actually in sympathy with the intent of the program when it started, and its attempt to get the big tax cheats into the system. For the cheating “Whales” that have come into compliance it is a great and fair deal. However, it is a “Minnow” fertilizer factory for us. I think the IRS has gotten hung up on “uniform” penalties when they should have been focusing on an ‘appropriate and reasonable” penalties. Justice is never uniform, and each circumstance is different. There is nuance. In America, we don’t punish jay walkers and bank robbers with the same sentence. Do we?

It is this lack of discretion that produces over-the-top absurd results that is in total opposition to your compliance objectives, and I state again, not representative of the spirit and the letter of IRM penalty guidelines.

In the current 2009 OVDP program, the IRS created penalties totally divorced from the tax or compliance failure. It is just a uniform 20% of the high aggregate account balances and some assets. That is why we now find ourselves subject to a non discretionary penalty for a tax failure of < $21K over 6 years as compared to, say, Tim Geithner’s tax failure of >$42K. His penalty – nothing. Ours – $172K. I hate to bring in this example, but what is wrong with this picture? Why is one tax failure better than the other? Where is the uniformity? Missing FBARs makes that magnitude of difference? Was that really the intention of Congress and the Statutes enacted?

If the OVDI or OVDP process provided an avenue for a Big Picture “reasonability test” on the penalties (management discretion to adjust) before a field agent sent out the 906 closing agreement I would have less complaints. I may still not like the result, but at least I would know that someone was using the discretionary guidelines that are in the IRM. At least I would know that there was measured, nuanced justice, not a so-called “uniform” justice-by-the numbers.

Does my logic make sense to you? Am I connecting? Can you empathize with that perspective at all? Can you feel our pain and hear our frustration?

To their credit, my examiner and her manager spent a lot of time trying to determine if they could remove my house value from the penalty structure because they wanted to be reasonable on penalty application. But they were over ruled by the “Technical Adviser.” No discretion allowed! And, no one else, it seems, in the IRS hierarchy has the power or wishes to apply the discretion of a reasonability test to the ridiculous OVDP penalties which the process produces.

Pleas for discretion within the process, as I have documented in the enclosures, have had no effect except to tire my examiner. The only option I now have after 21 months of expending 100s of LCUs (Life Credit Units) and providing full audit disclosure and open cooperative effort, is to “pay up”, “Opt out” or get “kicked out”. Given the unknown IRS mindset outside the program, it is a very risky decision considering how FBAR penalties can technically be assessed per CD or term deposit account. Additionally it is a very expensive in LCUs and money to now be forced to go through more audits and rely on an appeal process outside the OVDP as your only avenue for relief. I can not possibly afford the huge attorney fees that would require. It would also consume a lot of IRS resources, needlessly, to re-discover what you already know. I am a Minnow.

So, maybe you understand why I writing once again, to see if there was another way. Maybe not. I fear not. Maybe I have to be the collateral damage of the OVDP drone program, however, I went into this process naively thinking reason or logic will prevail in the end, but so far, it has gone the opposite direction. Frustrating!

Sincerely yours,


Cc President Obama

Senator Patty Murray

Senator Maria Cantwell

Representative Caroline Maloney, Co-chair Americans AbroadCaucasus

Representative Joe Wilson, Co-Chair Americans AbroadCaucasus

Marylouis Serrato, Executive Director, American Citizens Abroad

Jacqueline Bugnion, BOD, American Citizens Abroad

Case study chronology of the 2009 OVDP process for just me with documents.

Below is the sequence of major events in this entire OVDP process with event dates that has brought us to this point. I have included all relevant correspondence. A lot of LCUs (Life Currency Units) have been expended here that don’t figure into penalty calculations.

September 22nd, 2009. We first learned of our liabilities and the OVDP program from a story on NPR about UBS tax cheats the IRS was going after. That led us to consult with an attorney and a CPA for the first times in our lives. Thus began an education on a world of regulations and rules we never knew existed. It was the beginning of a long and frustrating process.

October 8th, 2009. We submitted an amended 2008 tax return which was done by the first CPA we have ever used in our life, and paid the additional $904 of taxes due on an amended 2008 1040. We were introduced to the form 1116, Foreign tax credits. What a complicated form that is! We didn’t get credit for all the tax we paid in New Zealand for reasons our CPA could not explain. We also mailed in all 2003-2008 FBARs after a lot of hard work gathering banking records. Our files were at our home in New Zealand, and we were just temporarily in the States visiting our family. We had to get this done by the new Oct 15th deadlines we just discovered..

October 12th, 2009. We applied for inclusion into the OVDP program following the required submission guidelines. Boy were we naive in thinking our pleas for re-consideration of the penalty levels would have any effect. (See attached Exhibit A)

Exhibit A- Oct 12 2009 -OVDP Final Version – Redacted

October 18th, 2009. We wrote Commission Shulman a letter pleading our case that we were not the target audience of the OVDP. We feared we were entering a process designed for “Whales”. However, it had a net mesh so fine, and was cast so wide, that the “Minnows” like us were going to be caught, placed on a “uniform” conveyor belt process and spit out the end as fish fertilizer.

(See included Exhibit B… Letter produced above.)

Oct 18th, 2009. We wrote letters to all our Legislators and Legislators on various committees with IRS oversight. They were Representative Charles Rangel, Senator Patty Murray, Representative Rick Larsen, Senator Baucas, Senator Cantwell, Senator Levin and Tim Geithner. Only heard back from one. Rick Larsen. Nothing happened of course. We are just a small voice drowned out in a sea of special interest cries for assistance. We don’t have a big lobbyist firm with lots of money to get us special attention for excluding offshore income like GE. (See attached sample letter Exhibit C)

Exhibit C – Oct 18, 2009 – Rep Rick Larsen – Redacted

November 2009– February 2010. We spent a lot of LCUs collecting all the data required to amend our 2003 – 2007 returns. We had to wait for a copy of a lost return from the IRS before we could finish. While we waited, we sent in estimated tax payments way in excess of our failures just to be sure that we stopped the clock on interest penalties. Which by the way, the estimated payments for 2003 were sent back to us, as the IRS couldn’t process them beyond the statute of limitations (SOL), and we had to return them again, pleading with them to hang onto them so we could stop the penalties from accruing

Also, on one of our amended returns, 2006, they took the money, but sent a letter which said since our income tax failure wasn’t substantive, they couldn’t accept it, again, due SOL. We could apply for a refund if we wished by December 2012.

With our amended tax returns finally finished, we waited for the fateful call from an IRS examiner.

April 7th, 2010. We received a reply letter from a Kevin McCarthy dated April 1st. He was, at the time, the Acting Director of the Fraud/BSA, Small Business , Self-Employed Division. In it, he acknowledged my letter to Commissioner Shulman, and basically re-stated the 2009 FAQ 35 as my solace for relief, while maintaining the IRS position that this was a “uniform penalty structure to be sure taxpayers are treated consistently and predictably”. (See attached Exhibit D)

Exhibit D- Apr 1, 2010-Kevin McCarthy Letter -Redacted

April 18th, 2010. I replied to Kevin, expressing my disappointment in the letter’s message, but did appreciate a response to my letter to Commissioner Shulman. I was actually surprised that my letter must have been read. The letter from Kevin had the feel of a form letter, but there was still enough personal details referenced from my letter to Commissioner Shulman to convince me that at least some momentary consideration was given. Don’t really know how much they digested of the points I was trying to make. (See attached Exhibit E)

Exhibit E- Apr 18, 2010 -Letter back to kevin McCarthy-Redacted

Then I waited, again. Tension building!

In early June, 2010, I received the first phone contact from a very congenial audit agent out of Phoenix. It was followed a few days later by the standard IRS form letter requesting that we produce a lot of material for auditing. Boy was that fun! Not.

June 9th, 2010. Contacted my examiner by phone after receiving the letter, to let her know that I would not be able to met the deadline for submission, as the data requested would take a lot of time to compile and audit before I could send to her.

Went to work collecting, organizing, auditing and detailing a comprehensive response package.

August 15th, 2010. I produced and mailed an the incredibly comprehensive pile of paper required to be disclosed including all by bank records, tax returns (original and amended) all FBAR copies, my calculations of the highest aggregated account balance, calculations of all interest payments received in NZ and Australia, and express mailed it from New Zealand to Phoenix. It was a BIG package and cost $80 to send.

In my production and review, I went back over all my amended returns, to be sure they were accurate and re-audited it in detail putting myself, into an examiner’s mindset. If I was doing my examiner’s job, how would I want to see the information? That uncovered a few minor errors which when both ways, in my favor, and in the IRS favor. I disclosed and corrected them, even a mistake made by our CPA on the handling of my minor US pension payment which he mistaken listed as tax exempt in 2008. Not sure how that happened, but for that, I had paid him over $1000. I shook my head in wonder. At least I got an education that allowed me to follow his work on the form 1116 for subsequent year amendments which I did myself to avoid more expense and costly errors.

I also went over my all bank CD/Term account statements in detail, and highlighted ever deposit and withdrawal with a comprehensive legend so an examiner could follow it.

I also created a fund flow sheet to be able to follow the movement of term deposits we had which matured and were moved to new accounts based upon the interest rates available at the time. It was all the same money, but each time a maturity was reached, often a new two number suffix was assigned to a bank account number, creating a new technical account which, don’t you love it, the IRS could assess a separate FBAR penalty, as I learned painfully later.

Finally, as support to ridiculously complex form 1116, Foreign Tax Credits, (which no human alive could read the instructions and understand them in full) I detailed every interest payment and tax deduction which showed up on our bank accounts to assure that each of those tied to the actual bank records and the form 1116. Boy, was that exhaustive effort. I am not a CPA, or even an accountant. I did not play one in the movies. I have never had an accounting class in my life, but I have learned to work a spread sheet, and though it is not my favorite activity, I can do the Drudgery of the Numbers if it is required. I can’t imagine how much this would have cost me if I had a Practitioner or a POA (my examiner’s preference, btw) do all of this. I saw on a blog that some poor fool (I use the term affectionately because I include myself in that characterization) had to put on adult diapers when he got the bill from his Attorney for $200,000. At least I have avoided that expense by doing all of this detail drudgery myself.

However, a real deficit of LCUs was created with all the hours of effort. At least 120 or more were expended, but I lost count.

I also pleaded my case again that this penalty structure seems inappropriate for me. (see attached Exhibit F.)

Exhibit F – Aug 15, 2010-Audit Response Letter – Redacted

Then I waited again.

October 22nd, 2010. I received in the mail a request to sign a SOL extension for 2007 taxes. Didn’t quite understand what this was all about, as I had already agreed to amend taxes as part of the OVDP program. Without Council advice I decided to sign it, as didn’t want to upset the IRS. They say I was not required to do it, and would not be held against me if I didn’t, but… So we played the game that it was a voluntary act on my part. I wanted to be sure I did not give the IRS any excuse to say we were not cooperative. Took the opportunity to point out what I was seeing around the web about the problems with the OVDP penalty process. (See attached Exhibit G)

Exhibit G – Oct 22, 2010 -Letter To Examiner – Redacted

Then I waited again.

After Christmas 2010, I received a call from my examiner, that due to IRS workload, my files had not yet been reviewed, (I imagined a BIG stack of papers sitting on the floor in a corner someplace) but would I please provide the valuation on my house so the form 4549-A, Income Tax Discrepancies and form 906 Closing Agreement could be prepared. I got my first hint that something was going sideways, when the examiner said my home value might have to be included, but I wasn’t to worry yet as she was reviewing with her “Technical Adviser”, as that didn’t seem right. Could I please provide more information about the circumstances of acquisition of my home and the reasons for our holiday rental income, non substantive as it was.

December 29, 2010. I replied to her request. It was a pretty comprehensive history of how we came to retire in New Zealand starting with our cruising life on a small sailboat in the Pacific beginning in 1989. My wife is an Australian, so moving to NZ is like you moving to Oregon. She is also a 30 year US Green card holder, but wanted to settle back in her neighborhood come retirement, and so we did. (see attached Exhibit H)

Exhibit H – Dec 29, 2010-Letter to Examiner – Redacted

February 2011. John McDougal removed the discretionary provisions of FAQ 35 from use in the field for the OVDP program. Have just seen this reported on the web and in blogs, but have never seen it in writing from the IRS. As of this date the provisions of the 2009 FAQ 35 is still on the IRS.gov site. It has been stated that there was mis-communication in the agency about application of penalties, that caused the confusion in the field. It was always the “intention” of the Commissioner (blame Shulman?) to compare OVDP penalties to the Maximum penalties allowed under the Statues. But, of course, that is not what FAQ 35 said. If you got in your request for FAQ 35 consideration before February, it would be honored. If it was after this date. Tough. Another technical barrier, added to the program after the fact without any written documentation.

March 10th, 2011. We received the preliminary form 906 Closing Agreement. Our proposed penalty was to be ~$172,000 plus interest and 20% accuracy penalties on our amended returns.

Our hearts stopped and the fish fertilizer fear appeared as a very possible outcome. I was STUNNED!!

Up to this point, I had been figuring worse case scenario the OVDP penalty would be around $80K. That had given me enough heart burn that I had written Commissioner Shulman at the beginning of this process asking for relief as mentioned previously. (Exhibit B) Now this? What could I do?

March 11th ?, 2011. Finally broke down and contacted a well know and well-regarded Tax litigation attorney Jack Townsend to review our case and explore other avenues available to us to mitigate penalties. We also reviewed the implications of an Opt Out including the legal processes for appeal. That conversation was very helpful, but VERY EXPENSIVE too.

He said maybe I would have to consider an Opt Out and take my lumps. That was the first I had heard that was even possible. What did that mean? We had thought, that once we had learned of our FBAR compliance failures, we had no option but to voluntarily disclose via this OVDP program. To do differently, like just doing a silent disclosure was dangerous. We would certainly guilty of a “willful” action if we did that. I hadn’t felt that our failures were of the willful type the IRS was going after in this program, but now I was beginning to understand, that in the legal and technical world the IRS lives in, the IRS was defining “willful” in some pretty broad terms. While the burden of proof was on the IRS to prove “willfulness”, fighting that determination, and even with court cases going against the IRS on their “willfulness” determination, you could burn up more time (LCUs) and more legal expense than the OVDP penalty in the first place. Very, very frustrating.

March 14, 2011. I wrote back to my examiner about the errors and omissions in the 4549-A Adjustments after I had done a detailed audit. To do this I had to take all her numbers, and create a spread sheet. I had look at each amended return to figure out how she came up with each numbers. I had to determine what formula was behind a calculation in a box. Also I had to research what FX rate she was using as it was different from mine. In this day and age, it is just stunning that she can’t send me a spread sheet by email, so we can work from the same document. If this had been a business review, it would not have taken long to do. If I had the same spread sheet she was working from, it would have been much easier. But… given the IRS restrictions on email modernity, it took quite a few hours to reproduce her work. More LCUs expended. (See attached Exhibit I)

Exhibit I – Mar 14,2011 – 4549-A Letter – Redacted

Below I have attached a 4549-A Excel workbook that you can use to audit the Examiner’s work.  I highly recommend that you audit it line by line, as I did find errors.  The Work book comes with a summary sheet which is linked to each year’s tab.  All sheets are protected, but no password is used, so you can un-protect it to add additional rows if necessary, or add and link up additional years sheets.

4549-A Audit adjustment workbook

March 29th, 2011. I wrote my examiner about the 906 calculation to inquire how she had determined the highest aggregate. (See attached Exhibit J) Frustration is building here, and there is a long editorial on the process. That now just sits in a file somewhere without seeing the light of day, or getting any management review and discretionary consideration. It is not allowed in the process.

April 13th, 2011. Left our home in New Zealand and traveled via Australia on our way back to the States. Had advised my examiner of our travel plans in Exhibit J, and via phone conversations. Arrived back in Seattle, April 22nd, and continued my phone contact with discussions about 4549-A and the 906.

April 14th, 2011. Received several voice mail messages in Australia about my audit of the 4549-A.

After telephone tag, we agreed to talk in detail when back in the States and I had my spread sheet and her documents in front of me for review.

May 3rd, 2011. Had a lengthy phone conversation about the form 4549-A and the 906. We resolved our differences on the 4549-A, but not the 906. Discussed Opt Out, and what that meant. She strongly advises that I get legal advice, if I thought that I wanted to do that.

In the intervening days, I spent a lot of time reading Legal Blogs on the OVDI and OVDP processes. I also printed and studied the IRM 4.26.16 on FBAR laws and penalty application. I was trying to self educate, as attorney costs for this specialized area of tax compliance is very expensive. I reached out to American Citizens Abroad for attorney suggestions, as I probably did need some more advice.

May 12th, 2011. I contacted another Attorney, Hale Sheppard, who was referred to me by American Citizens Abroad. He has a long history in FBAR compliance issues, and is extensively published on this subject. He gave a very sobering assessment of my situation, and practical advice about the application of FBAR penalties outside the OVDP. He also discussed the current hard-line mindset of the IRS and how the Appeal process works. Cost for him to represent me, should I decide to Opt Out, would be significant. (Exhibit J.  Evolution of FBAR by Hale Sheppard)

Exhibit J Hale Sheppard Evolution of FBAR

May 13th, 2011. Decided to write another letter to my examiner and officially ask in writing for FAQ 35 consideration, even though she has verbally indicated before it wasn’t available to me. Still looking for where it is in writing that it was removed. (See attached Exhibit K ) Frustration with the process is really rising.

Exhibit K – May 13, 2011 -Opt Out and frustration letter – Redacted

In this letter, I re-produced a copy of the Daily Tax Report, 181 DTR J-1, 09/21/2010. It was written by Mark E. Matthews and Scott D. Michel. It is very good, and a fair representation of where we are now. I don’t know if IRS management has seen it. It should be required reading by all examiners and supervisors and managers in the IRS who are actively involved in this ODVP process. It speaks to many of the issues I have been experiencing. I have included it here. (See attached Exhibit K-1)

Exhibit K-1 TaxReport_OffshoreAccounts_21sept10

May 18th, 2011. New 906 issued and arrived in the mail to include changes I had made in the penalty calculations. 4549-A still not correct to show tax payments made in January of 2010 and not yet recorded properly. 4549-A form shows I still owe taxes, and actually I should have a balance due me, as I had over paid to stop penalty calculation.

May 27th, 2011. After further phone conversations, I wrote my examiner about the adjustments to the 4549-A and clarified my understanding of her verbal refusal to allow FAQ 35 review. She still can not produce that change in writing, and apparently, neither can her Technical Adviser. Also, she had mentioned that I had the right to Opt Out, so I requested more information on this. (See attached Exhibit L)

Exhibit L – May 27, 2011 – 4549-A revised again – Redacted

June 1st, 2011. I wrote my examiner to see if there was another technical definition of house value which could be applied and reduce the OVDP penalty. No Joy! Also  informed her that I was going to contact Kevin McCarthy who had originally written me and had provided me the FAQ35 protection.  Also would wait to see Opt Out guidelines when they are issued before deciding. See attached Exhibit M)

Exhibit M – Jun 1, 2011- House Value, FAQ35, Opt Out Questions

June 2nd, 2011. Downloaded latest OVDI and OVDP “Opt Out” procedures as issued by Stephen T. Miller, Deputy Commissioner for Services and Enforcement. Not much encouragement there. Lots of questions for my examiner as to what it means. There are some vague statements about “cases being assigned for other treatment.” Huh? What does that mean?

June 6th, 2011. Signed and returned statute of limitations for 2004 FBAR under threat that if I refused to sign, the IRS may assess 2004 penalties immediately. My examiner was under a lot of pressure by her managers to get this from me, as she called and asked about it multiple times. The request always came with the caveat, that it is voluntary, of course! The game continues. (See attached Exhibit N)

Exhibit N- Jun 6, 2011 – SOL Letter – Redacted

June 8th, 2011. Call with my examiner about the meaning and the unknown crocodiles in the new Opt Out Procedure. She doesn’t know what it means that “cases being assigned for other treatment.”

It is obvious, in the factual statement I have to produce for our Opt Out, in the key consideration, she and I disagree on what constitutes “willful”. I understand her perspective, but just disagree with it. She is taking the hard and fast / technical route that a checked box indicates “willfulness” not to file a FBAR.

There is a wide gulf here between us on what is considered willful. We have a spirited, but respectful conservation about the IRS perspective, versus the taxpayer who doesn’t live in her technical world. She does concede that we are not the same degree of willful as those hiding funds in Swiss Accounts. So are there degrees of wilfulness, in the IRS eyes? Is that considered in the Opt Out. Or is it black and white like everything else so far. Don’t really know.

Also, she advised that I should calculate FBAR penalties outside the OVDP as per the IRM based upon each account having a FBAR penalty. Would they double count? First she says, of course not, and then after a conversation with her “Technical Adviser”, she calls back to say, yes they will double count accounts. What?!

So, if the same money is in two different accounts in the same year, I am to calculate two FBAR penalties. Example. If my $10,000 CD rolled over to a new CD during a year, it would have to be counted twice as $20,000 in the high aggregate because technically two accounts apply when the new CD with new suffix is issued. Go figure.

When you apply that technical standard, penalties can shoot through the roof to absolutely ridiculously absurd amounts. It moves you into mitigation levels in the millions even though we didn’t even have $XXXX in retirement savings in NZ. Will the IRS insist on that level of penalty application outside the OVDP? Surely not, but it is unknown. Would you take that bet? How much money to you want to spend with an attorney fighting that? A big risk to the Opt Out.

June 21st, 2011. Received a new form 906 with an accompanying form letter 4564 which was dated June 20th. It basically informs me that if I want to Opt Out, I have 20 days to decide. I have two choices I can make, and one they will make for me. They can not provide advice as which way to go.

  1. Go the irrevocable (another technical hurdle to deal with) “Opt Out” route with all its uncertainty and take the lumps as they fall, or
  2. Sign the 906 and pay up the Over-the-Top penalty, or
  3. Failing to do either, get kicked out of the OVDP program involuntarily and end up in step 1 anyway
June 22th, 2011. Called my examiner and her manager for a long conversation about what additional visibility they might have as to application of discretion outside the OVDP. They were polite and professional. They stated that they had heard that the very first Opt Out had just been processed, but no idea of the outcome by the Management Committee given this task. They were in the dark as much as me. As an aside, I wonder who is in the Management committee. If it includes John McDougal, you don’t have a chance, as he is too much immersed in defending all the rules and regs that seem to emanate from him. I could be wrong in my impression.

Also discussed what payment programs are available if I am forced to pay this $172K. I don’t just have that money sitting in a checking account. It will take a little while to raise it. I will have to liquidate retirement savings, and maybe transfer funds from NZ. That all takes time. Examiner and her manager don’t seem to know what flexibility is allowed, as they just turn it over to Collections, and have nothing more to do with it after that. I called the Tax Advocacy office, and they think it is a standard 120 days, but I should contact them myself to be sure. I am now thinking the unthinkable as time ticks away, so need to do some contingency planning.

June 25th, 2011. We are at the end of the line, so now time to go back to the beginning and the top of the hierarchy. I have tried working within the system, and have had zero success. I called Kevin McCarthy who was the original responder to my letter to Commissioner Shulman. Got an empathetic hearing and a promise that one Victoria Gally would review our case and call me on the 27th.

June 27th, 2011.No call from Victoria Gally today. Down to 14 days until decision time. Wrote a letter to Kevin McCarthy, thanking him for his time and interest. (See attached Exhibit O)

Exhibit O -June 25, 2011- Thnx to Kevin McCarthy-redacted

June 28th, 2011. No call from Victoria Gally today. Letter sent to my examiner updating her as to our decision process and confirming my understanding of the deadlines. I have included a copy of Tax Analysis document service DOC 2011-9908, written by a Jeremiah Coder. (See attached Exhibit P.)

Exhibit P – June 28 2011- Respone to Letter 4564 Opt Out-redacted

Exhibit P-1 MCDOUGAL announcement TND Doc 2011-9908

13 days left until execution date. (That is how it feels to me.)

Personal note: I have an abscessed tooth and having a hard time concentrating on this. Popping antibiotics and Advil pills.

June 29th, 2011. Still no call from Victoria Gally today. Finish up and sent this letter Express mail to Commissioner Shulman.

Final Comment: Hope is running out that any reason will prevail within the OVDP. Outside it is so very uncertain, and why does it have to be that way?

12 days now left until my execution date.

Side note: Is this how the Empire slips into decline? Mindless audit processes that bludgeon the middle class while the oligarchy of Corporations and Financial elite just get richer. The deficit widens while Republicans refuse to consider new sources of tax revenue via simplification of tax codes or elimination of Corporate loopholes. So, the IRS is left to try to increase intake, via OVDP and OVDI penalties without any discretionary review. And who is the unintended target? The least powerful of society are the pasties, while at the same time the IRS is giving $3 billion in Tax refunds to GE and they pay no taxes at all. Unbelievable.

And you wonder why it is hard not to be cynical.

End of letter.


Additional correspondence Documents that followed my Shulman letter above.

After I mailed my letter to Shulman, and with 11 days left to “Opt Out” or be “kicked out” decision , on June 30th, I emailed the TAS offices of Nina Olson. 24 hours later I received a call back setting up a conference call. Also on the 30th, I finally got a hold of Victoria Gally and she arranged for a conference call on July 5th. The TAS joined in, and that was the beginning of the end of my ordeal. Below is the correspondence that followed.

July 2nd, 2011.  Letter to Examiner advising her of my decision to contact the TAS and provided a copy of the letter I had sent to Commissioner Shulman (See attached Exhibit Q.)

Exhibit Q- Jul 2, 2011 – Letter about Shulman and TAS appeal – Redacted

July 11 th, 2011. Letter to Examiner post Conference call with all IRS parties including TAS.  I confirmed 30 day extension to “Opt Out” deadline, and FAQ 35 understandings plus “willfulness” disagreement.  Included in  the letter was the article called  “Checking No isn’t Apropos” by Daniel L. Gottfried, September 20, 1010 ( See attached Exhibit R.)

Exhibit R- Jul 11, 2011 – Followup Letter post Conference -Redacted

August 5th, 2011  Below is a copy of the TAS FAQ35 appeal made by the TAS on my behalf to the IRS Examiner.  After the TAS issued a Tax Advocacy Order (TAO) shortly after July 11th, my examiner suddenly found some discretion, and offered to lower my penalty from $172K to $115K .   The Advocate Case Officer did not think that was good enough, and it was their opinion that the maximum penalty should be $25K as probably the best deal they could get out of the IRS examination department.  It was their decision to counter the $115K with a $25K offer.  Here is the letter they used for that argument.  There maybe language or references that others could use in their Opt Out appeals. (See attached Exhibit S.)

Exhibit S – TAS FAQ 35 appeal – Aug 5,2011 – Redacted

August 23rd, 2011.  I wrote a letter to my examiner and sent a check for $25K, which was the negotiated settlement between the TAS and her office on August 18th.   Given the stress and the high level of penalties that I was staring at, $172,  I was so relieved that I felt that this was the best deal I was going to get, thus it was probably reasonable and fair, given the IRS FBAR environment and mindset.  As time as passed, I now think I left too much money on the table. It wasn’t fair, but in the end, mine was a business decision to bring the nightmare to an end.  Reading back on it now, I was probably too patronizing to my Examiner.  There is something intimidating about the whole process that makes you feel guilty, even when you know you are not.   My approach through out the process was to keep it from becoming personal and stay away from acrimony that might add to my problems.  So, at times you have to grovel.  🙂  (See attached Exhibit T)

Exhibit T- Final Settlement payment -Aug 23,2011 – Redacted

Sept 7, 2011  I sent in my final signed 906 which had inaccurracies, and made comments about that as well as faults on the final 4549-A which was still wrong.  Also had to add my editorial comments.  I am always amazed how the IRS is willing to be sloppy with their own work, and not be correct, but that is ok form them, but let you fail to file an FBAR, and katie-bar-the-door! (See attached Exhibit U)

Exhibit U-MVH 906 Signing Statement-Sep 7 – Redacted

November 15, 2011.   This is my final letter and parting shot to my Examiner.  In it I advise I am returning to New Zealand and point out everything that is wrong with this friggin’ process.  Also included a copy of an excellent Tax Notes written Scott D. Michel and Mark E. Matthews, titled “OVDI Is Over — What’s Next For Voluntary Disclosures?”  Then I couldn’t help but point out all the negative press the IRS is getting in Canada and gave her tons of references should she want to look up from her auditing desk and smell the stink of what she was participating in.  Probably not.   (See attached Exhibit V)

Exhibit V-Final Letter to Examiner-Nov 15,2011 – Redacted

and this is what I sent as an attachment in Exhibit V

OVDI Is Over — What’s Next For Voluntary Disclosures? by Scott D. Michel and Mark E. Matthews

Final Closure:   I wanted to make reference to the final chapter in this entire processes.  On Feb 12th or there about, I posted this on Jack Townsend’s blog, and thought I would also put it here…

Just a note to mark the final final end of the OVDP process for me. I guess this particular thread is as good a place to record it as any, as my story transverses multiple threads.

After 851 days, from entering the OVDP in 2009, I was informed by the TAS officer today, that the IRS has issued a refund check to clear all reconciliation items from the OVDP examination. Tomorrow they are mailing me a check for ~$3000 dollars which includes roughly $250 of interest for overpaid taxes. (actually received two treasury checks yesterday for $3925.01 which was more than I expected.  Don’t know why. Some computer decided I am sure.)

So, that is it! I am done. I guess I can stop blogging now. What a wonderful educational process it was, and what a model of efficiency it has been! Can I have my LCUs back please?

You know, if it only takes 851 days to process a Minnow, wonder what it takes for a Whale? The question now to be asked what did it cost the IRS in time, energy and dollars to extract the fish oil they squeezed out of me? I can guarantee you that no business would be able to survive on the ROI for this misguided adventure.

If you wonder why nothing productive gets done in government and why America is in such a fiscal mess, well wonder no more. If this isn’t a prime example of how to not to run a country, then there isn’t one. It doesn’t give you much faith for the future when the IRS still won’t acknowledge TAS Director, Nina Olson’s TAD. The response was due January 26th, but so far nothing. Probably nothing will come from her report to Congress either, where she so clearly pointed out how egregious their process was for the Minnows.

Then to think, 2 and ½ years later, the press has yet to write one meaningful story of what it is like for a Minnow to be involved in a program marketed as an amnesty for catching tax cheating whales, that was then proclaimed a marvelous success with nary a skeptical question from the MSM reporter scribes. (Amy Feldman from Reuters, the sole exception.) Sorry if this drips with cynicism.

All the best to the rest of you in the process. Hang tough and “Illegitimi non carborundum”, as they say! Please excuse my mock Latin! If you don’t know what that means, google it.

Thanks Jack for the outlet and the forum. Your blog has helped me immeasurably with your sage advice, and providing a sharing outlet for other Minnow’s out there. There was some small comfort in knowing that I was not the only fool netted! 🙂 I hope they all have better outcomes just like Moby and Sally did.

PS… I heard from my TAS officer that they are still helping Minnows trapped in the OVDP/OVDI. She had 4 cases herself that she was working on. So, if you are running up against the wall, I would try calling the TAS DC office and explore your options. They are good people, and do restore your faith in what good government should look like.

Nothing ventured, nothing gained.

Last comment:  If you have read this far, and I not sure what this says about you, but thanks! 🙂  Looking back on it, the journey seems even longer than the correspondence that is represented here.


112 thoughts on “Letters to Douglas Shulman, or a case study of OVDP communication attempts with the IRS

  1. @Just Me
    My god, you’re a strong person, to have gone through all of that and be who you are today. Thank you for all of your contributions to this site and sharing the journal of your ordeal, testimony to who we are dealing with.

    Frankly, it all just makes me want to curl up in a fetal position and pull the covers over my head, but I won’t. There are so many, besides ourselves, that we have to fight for.

  2. I read through most of it. You asked what that says about me. It says I need to Get A Life. I feel IRS has stolen the one I had until a few months ago.

    I also feel physically ill for you in reading this. I have no idea how you and your wife got through it. Has she demanded a divorce–solely on your place of birth yet? I’m am amazed that you could be so respectful, articulate and dignified in your comments to Shulman.

    I hope IRS 30 Year Vet will comment if he thinks IRS staff was reasonable in this case.

    This has reconfirmed for me that I need to continue to insist I renounced my US citizenship when I became Canadian in 1973. I just need to become even stronger about it now than I was before.

    Thanks for having the strength to relive your incredible nightmare to share it with us. .

  3. OMG, What a Ordeal you had to go through.. I am sorry you had to endure such a horrific mess. What a bunch of BS, to be put through. You are one strong person..I would have to be put in a mental hospital after that..really appalling!! Bless you and your family!!

  4. @just me

    Good letters, and I sympathize with what you and your family had to deal with.

    If you don’t mind me asking…and you probably stated this somewhere before, but did you have tax ‘owing’ to the US, or were these penalties strictly for not filing FBARs?

  5. @just me; absolutely incredible. How anyone could read this and still have any doubts about the seriousness of this legislation and the massive traps that have been set for honest, hard working US citizens living outside of the US is beyond imagination.

    How the sponsors and all those who reviewed the provisions of this legislation before it introduced and enacted by Congress could not have realized the monster they created for our own citizens deserves a much better explanaion than “we didn’t realize…” The power to tax is the power to destroy and it certainly has been and is being used for this purpose.

  6. Astonishing. Thank you for relating this story. I am amazed by your determination to do the right thing even in the face of obvious injustice. I am sure I could not have fought this as you did.

  7. “The strictest law sometimes becomes the severest injustice.” – Benjamin Franklin

    “The best way to get a bad law repealed is to enforce it strictly.” – Abraham Lincoln

  8. @Roger, this is a money grab, plain and simple. This is a really disgusting 3rd world tactic. I have plenty of examples, but I don’t want to throw fuel on the fire, so I won’t name specific similarities to other examples I have seen in my life.

    This was actually one of the “final straws” for me in my decision to renounce. The question I asked myself was “How could a country like the US be resorting to third-world tactics to shake down innocent people for money?” This is REALLY when I felt that all of the values I had been raised with, as a child and teenager, were just blatently disregarded. It really disappoints me so much to see the US stoop to such low levels.

  9. Just Me: Thank you for telling this story. This is history in the making. It is an astonishingly sympathetic account of a system that deserves no sympathy, and to your credit you emerge bigger than anyone else involved in it. Kudos.

  10. Now that Just Me’s story is out in the open, the IRS should be thoroughly ashamed. No third world corrupt government can top what the IRS has done.

    Anybody who says America is not in decline (that includes Obama) after reading this story needs to have their head examined.

  11. @Mach7

    You could be forgiven for not picking this up! I can hardly remember where I said it! 🙂

    Yes, I did owe taxes over 6 years. It came to $21k, or less than half of what Geithner owed. His penalty, nothing, not even an accuracy penalty as I understand it. (if I am wrong, I would be happy for someone to point that out for me.) My proposed penalty was $172K. I guess I should have been nominated for the US Treasury Secretary, and maybe I would have gotten some discretionary consideration. 🙂

    As I said to Shulman in my last letter…

    “Now setting aside any technical or legalese considerations of willful vs non willful, or reasonable cause vs just plain negligence, does the amount of $172,000 seem like a reasonable penalty for a tax failure less than $21,000 that was voluntarily disclosed and paid? Really?”

    Of course I never got an answer to that question.

    …and all others who have had the patience to read even a part of this, thanks. I think this graphically documents what it means for average middle class person to enter a Voluntary Disclosure process that has no avenues for discretion, or means for front end separation of Minnows from Whales. It is still punitive in nature, both in terms of $ and LCUs. I truly believe those that designed these programs have no idea of the impact of the monster they created. They haven’t a clue.

    And, you Canadians, you can be thankful for your CRA approach to voluntary disclosures which is much more civil and sane.


    “The Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA, without penalty or prosecution.”

    What a difference from the IRS approach, eh?

  12. @Just Me: My question is if your house, which you rented out a couple times, whether it has a mortgage. How did they figure the penalty? On the equity or on the assessed value, or on the book value (what you paid).

    We rent out a house. Fortunately it is in my wife’s name and owned by her (Shulman, don’t get any ideas–it really is her house, not something I’ve set her up in, ok?) My wife is a Canadian (Shulman, her grandmother was an American at birth, lost her citizenship when she married a UK-born Canadian–does that make my wife a US person for tax purposes?).

  13. Thank you for going into such detail. It’s remarkable that after having been through all of that, you chose not to withdraw but rather to use your very hard-earned expertise to help others. Your generosity is impressive.

  14. I am absolutely stunned and have read every word. I simply cannot believe what you have been through. If I were you, I think the last thing I would have energy for, would be to continue being immersed in this madness. Thank you for taking to take the time and LCU’s (:-) ) to share this all in one piece.

    The next time somebody suggests that I have reacted hysterically and certainly in error, to the Congress/IRS mess, I will relay your story. I am incredibly grateful that I did not hear about any of this until after the deadline for the 2011 deadline. And to imagine that I have made a mistake by renouncing because surely, the next message from IRS will be to accept TAD’s recommendations (ha ha ha), will just be another daydream……

    You and your wife are exceptional people and it’s a damned shame nobody over there, throughout this entire process, allowed that to be part of their awareness.

  15. @Roger, this is a money grab, plain and simple. This is a really disgusting 3rd world tactic. I have plenty of examples, but I don’t want to throw fuel on the fire, so I won’t name specific similarities to other examples I have seen in my life.

  16. My Son born in the USA when I was on H1 visa and returned to India when he was 3 years old. He is now 19 years old and can barely remember days in the USA. He inherited some property from grandparents and a tax cheat as per IRS for not filing taxes and FBAR. Since income tax brackets are so low, he owes no taxes on his investment income. He is a student. He is treated no differently than milliners who are living in the USA and intentionally hide money in tax heavens to evade taxes. When I told my son about FBAR, he hasn’t yet believed me. He said, it impossible that free country like the USA can imprison him for not filing FBAR, when no taxes are due. He agreed with me when I said I will file his nill tax returns and FBARs. But he said, he is ready to fight FBAR in courts, if any penalties are applied. He can’t afford a lawyer, so hopeful Tax payers advocacy or some other’s would help him.

  17. @Petros

    I did not have a mortgage.

    They assessed the penalty on the fair market value that year. They took the Council rate notices which are adjusted here yearly as a fair value. If I had been required to get an appraisal, the penalty would have probably been higher, as that was the peak of the housing market then, and home values were trading higher than Council values. Actually it was also the peak of the FX rate during that period which worked in the IRS favor too. They made you apply a year end FX rate rather than some blended average over the period which would have been fairer to all. But fair is not what they are about.

    Rental income applied to assets in 2009 OVDP only. In the current OVDI, it doesn’t matter, rent or not, the entire asset becomes part of the highest aggregate balance and not just bank accounts. 30 yr IRS vet was wrong, and I corrected him over on his other post.

  18. @Just Me – Had a similar situation with different twists. Learned about it in Seattle on vacation last year – was reading a Taxes for Expats books and about fell out of my chair. What the hell is an FBAR? Thought about OVDI and had a very short timeframe to make a decision. Finally found an accountant in Seattle who said to just file the darn zero back tax returns and the FBARs going back at least three years (I went back further with the help of my bank). With the help of a pro tax preparer it turned out I did owe for 2010 for an apartment I sold. Paid up. Yesterday got a bizarre form letter from the IRS that I do not understand.

    I also had a very hard time with my spouse. He’s european and does not want his information sent to the US gov. Alas many of our accounts are joint so I was literally begging him to please let me put the info on the FBAR. It was one of the most humiliating moments of my life. Picture that: American woman on knees before French husband pleading for help/permission. Almost as bad was arguing with my family in Seattle who thought (and still seem to think) that all this is quite reasonable indeed because the end (catching those evil tax evaders in Switzerland) justifies the means (OK a few people will get screwed). And, yes, I had a hard time talking about this at the time because I felt so STUPID. I thought I was the only person who didn’t GET the rules. Feeling much better now knowing that I am not alone.

  19. @Victoria

    Do your relatives in Seattle know about how this is affecting people in Canada and I am curious what they think. I know Seattle is reasonably close to the Canadian border so they are somewhat in tune as Americans go to what goes on in Canada. I am thinking as Canada’s role in this increases a lot of “progressive” minded Americans will view what is happening here as a complete betrayal by a country they always looked to for its social programs turning into a nation of “tax cheats” a Switzerland of the north that’s how I fear many American progressives will view Canada.

  20. @nobledreamer

    I can’t believe you ate the whole thing! 🙂

    Thanks for reading it. It will never a novel make, and wasn’t sure if there would be any that would be interested enough to actually read it.

    I have been somewhat hesitant to post all my correspondence but after talking with Moby about it, thought, what the hell. Might as well leave this history behind for others to learn from, as I have never seen or heard of anyone doing that before. You have to think there are a lot of folks that have suffered worse. I have gotten hints of it on Jack Townsend’s blog, but everyone wants to remain anonymous, generally speaking. If they have a practitioner handling the case for them, maybe some of the pain of the effort is exchanged for a large attorney fee. I think I recall seeing on Phil Hodgen’s blog someone saying his fees were $200,000 which was more than his penalty. When he received it he had to put on adult diapers.

    Maybe there are other stories out there somewhere of people’s experiences inside the OVDP/OVDI, but if not, I hope more will pull back the curtain a bit, and show what happens once you place your life at the mercy of the IRS VD programs. This will help others make more of an informed choice than just relying on practitioners to tell them what to do.

    and finally….You are right. I am mad to remain immersed in this, but I am probably on the wind down now and will be moving onto other things. I have no plans to renounce my citizenship, although my wife has cooled now on getting hers. I did not enter into this blogging effort to be an activist or change the world. I have tried to have the measured and reasoned man approach to this process from the beginning, however, if I was younger, I probably would be more of a hot head and radical in my reactions. Right now I just want to be a compliant little taxpayer with as little hassle as possible, and see what I can do to recover what has been taken from me by the IRS. However, I will forever advise new immigrants to America to think again. The cost maybe higher than they think for the privilege of that green card or US passport.

  21. @Tim,

    I have relatives in the States as well. I find the closer to the Canadian border they live, the better they understand our plight. Once you get beyond 500 miles…they just don’t believe you.


    I would be interested in some of the highlights of the IRS letter. I have been told that the more confusing the IRS response, the more likely it is a ‘warning’ letter not to do it next time and therefore you should be in the clear.

    If so congrats!

  22. The story is a sad one. You were/are so far away. Nobody is going to go after you in New Zealand. Is it so hard to just not visit Seattle any more? The moral of this is stay low, do not tell them where you are, and just do not visit the USA. Period.

  23. What my Georgia sister (transplanted from the Seattle area) said upon reading your account, Just Me:

    “…what I have read so far makes me so sad for him and his wife and I know you and everyone else going through this have felt every one of his feelings as you have struggled with this. He was so very good at getting the emotional thought processes on paper as he went through this from day one. What this has done to people is going to stay with them all of their lives; it is life changing, no matter what the outcome is. It is a tragedy that anyone has to have their ordinary lives changed in this way.

    Here I sit, an ordinary citizen of the U.S. residing in the U. S. and I have to wonder if something along these lines could be drafted that could change my life and the lives of my children someday. Ordinarily I would think not, but I can see from knowing your story and reading the story of others how one day people who are happily living their lives, as honestly as they know how, could have their lives turned upside down the very next day because they stumbled upon this new knowledge. I don’t believe anyone should feel safe when such power exists. What really struck me was his thought that there were human beings in the IRS and the government with feelings that could be empathetic to what they were going through; that was always one of my first thoughts. Surely, this could not happen to you and others based on that thought alone; to me, it is just common sense. But human beings, after all, drafted this whole idea of going after tax evaders in this fashion, with no consideration of what it was going to do to the lives of ordinary people caught in the trap along the way or to the lives of their children.

    I have such respect for every one who is fighting so hard for themselves and for other people who don’t know how to fight for themselves.”

    And, now that she has finished the entire post, Just Me, my US sister says:

    “I’ve finished reading ‘Just Me’s” entire post. What an interesting and disturbing account. He was so wrong to think that not very many people would want to wade through it all. It took no time at all for the article to grab my full attention.”

    So, once again, thanks for taking the time to post all of what you and your family went through. All who read your account will come away disturbed at what is happening in the US quest to find the” true tax evader,” thinking it OK in the process to do what they are to the majority who are innocent and painting us all with the same untrue description.

  24. “Whenever a separation is made between liberty and justice, neither, in my opinion, is safe.”

    – Edmund Burke

  25. @calgary411.

    Thanks for that feedback from your sister in Georgia. I must say that I am moved by the fact that someone so removed from this situation would actually find my account compelling enough to comment like she did. I know this has consumed me, but I also recognized that many Americans have other issues just as personal and life altering for them that compete for attention. I often think of those losing their homes in foreclosures, or unemployed due to no fault of their own from the financial crisis. So, I try to be somewhat modest that anything I have to relate would resonate with a broader audience.

    As a friend of mine said, “there are so many other issues that need fixing in America, it is hard for me to worry about the plight of a few Expats.”

    And that is the reality of the times we live. As the Chinese proverb is translated to say, “May you live in interesting times.” This is a little more interesting than I bargained for. 🙂


  26. @Just Me

    Interesting — one of three Chinese curses, says Wikipedia:

    “May you live in interesting times”, often referred to as the Chinese curse, is reputed to be the English translation of an ancient Chinese proverb and curse, although it may have originated among the English themselves. WE’RE ALL ASKING OURSELVES — HOW DID OUR LIVES BECOME SO COMPLICATED?

    It is reported that it was the first of three curses of increasing severity, the other two being:

    “May you come to the attention of those in authority” (sometimes rendered “May the government be aware of you”). This is sometimes quoted as “May you come to the attention of powerful people.” (Alternately, “important people”.) IS THIS THE IRS?

    “May you find what you are looking for.” This is sometimes quoted as “May your wishes be granted.” IN THIS REGARD, I DON’T CONSIDER THIS A CURSE — I’M LOOKING FOR SOMETHING AKIN TO RESIDENT-BASED TAXATION AND FAIRNESS.

  27. Just Me – thank you very much for taking the time to share your journey. It is so far-fetched that it sounds like a movie plot.

    I joined OVDI and then opted out and renounced. I have yet to hear from the IRS and patiently check the mailbox every day…

  28. @Proud Canadian,

    Yes it is hard not to go back to the Seattle area. My 85 year old mother lives in Bellingham, and I have a sister there too.

  29. @Victoria,

    Boy you sure have strange reading habits! LOL. Although, I wished I had been reading that way back in 1989 when we headed off shore for freedom on the seas. I should have known that something was up, and that the US government would still be checking up on me. I noticed back then that every port of every country we entered in the Pacific was required by the US government to fill out a “small vessel report ” (SVR) as part of our check in and check out procedure. They were required to fax it back to the US Coast Guard in Hawaii. So even then, the government was trying to track our movements. Probably now, they have to send it to the IRS too. God love the French, as in Polynesia and in New Caledonia, they refused to do it! I wonder if that is still true.

  30. @Just Me – yes, doing this on my own. I had sent in an initial letter and just after I got a response that they had accepted me into OVDI I opted out. Still utterly ridiculous that they did not kick me out immediately since I clearly was not their target!

  31. @peg11

    I might be able to help you with more specific arguments and process info if you’d like (offline). You can email me at moby.mcminnow(at)gmail.com. Just Me can verify my identity via other channels if needed.

  32. Pingback: Life, liberty and property: Why is person’s principle dwelling part of the ODVP? | The Isaac Brock Society

  33. One way to gain some leverage in this issue is to encourage everyone you know to pull all US Stocks/Funds/ other securities from their portfolios, stop spending money in the States and write a letter to President Obama explaining why you’ve done it. Hitting them in the wallet is usually the best way to gain attention on an issue. Once this issue gains more traction in Canada (especially ones directly impacted), it is going to create a sh*t storm like no other. Relations between the two countries will be GREATLY impacted. Lets face it, a large chunk of US money spenders are from Canadians that have ties to the USA. That all ends when you enforce something crazy like this.

  34. @ Jesse I would think that most of the readers here have already done that. Now talk your other friends around the world into doing the same. I did the disinvestment thing, but not the letter. I just blog on it. I am actually shorting the US dollar in my investments, and now that the money supply is growing again, I expect to do well this year.

  35. Thanks, Just Me.

    I submitted the following to the TAS Office of Systemic Advocacy, February 26, 2012 (only 2,000 characters allowed so had to be brief):

    Parents/guardians/trustees of developmentally delayed dependent adult children cannot renounce US citizenship on their family member’s behalf. That dependent adult does not have the capacity to understand either the benefits of US citizenship or consequences of its renunciation.

    Parents/guardians/trustees make all day-to-day decisions, some of life or death, for their family member’s well-being. They need to live in the same country as their family, without the prohibitive stress and monetary cost of yearly US tax and reporting compliance.

    Most countries have better rights for developmentally disabled persons, better health care benefits, better tax-assisted savings plans for retirement. They are discriminated against by the persons looking after their well-being not being able to renounce their US citizenship on their behalf to end unnecessary administrative costs (by their government funding) for US tax returns with $0.00 owing and possible prohibitive penalties resulting regarding FBARs.

    Because of additional health problems most of these developmentally delayed persons have, it makes no sense for them to live in the US where they would not have the health care insurance or benefits they have in their family’s country.

    Who will administer the responsibilities of their US citizenship when the US parent is either incapacitated or deceased? To have an executor carry on this pointless yearly exercise is a further expense charged to their government disability benefits.

    This is discrimination on the basis of citizenship, i.e. our dependent children have additional compliance requirements, additional expense of administration, all for $0.00 owing to the US, because they are considered US citizens in addition to the citizenship of their birthplace.

    These dependent individuals are denied health care assistance from the US in the country where they live. It appears they are denied access to benefit of legal tax laws provided by their country to save for retirement in their resident country.

    Let those of us who look out for our developmentally delayed dependent family member’s well-being EVERY DAY be allowed to renounce that US citizenship on their behalf and continue in the important things like ensuring the quality of life for our sons, our daughters.

  36. @calgary411 It is sad, as it is so logical you wonder why you even have to make these arguments. At least with the TAS, I do think, your thoughts/proposals will get a sympathetic hearing. In fact, they could be part of a new Report to Congress, which they can just ignore as they are too busy attending fund raisers by Super Pacs and Lobbyist to take note of mere mortal persons asking for a fair hearing. The only lobbying organization of ‘real persons’ that has enough power to get attention of Congress is AARP, and I don’t know how you make this an issue for them…..humm

  37. Just Me

    You have done an incredible job posting all this information and I must commend you for your courage in opting out at a time when it was unclear how the government would respond and how draconian they would be.

    I did have a request. Could you upload some of the arguments the TAS used to reduce your penalty (after redaction of personal matters, of course) ?

  38. kiro,

    Thanks for your comment.

    Yes, I will do that. It has been on my list to do along with some of my other correspondence. I have been more focused on Moby’s letter and his Opt Out Post that I put up. His letters are invaluable for Minnows. I know of folks that are going to model their Opt Outs on what he said.

    Hopefully you have read that too.

    Moby “Opt Out” update

    My letter from the TAS was more specific to my particular circumstances, but since it was written largely by TAS attorney and Case officer, it does have good IRM referenced material for “reasonable cause” non willful penalty arguments that could be used by others.

    Now, I did not get as good as a result as Moby, but after facing $172K penalty…. $25K seemed such a relief I was happy to take it at the time. I now think, I could have done better in an Opt Out, and probably would have appealed the $25K penalty as still to high, but hindsight is 20/20 as they say. Bottom line, I could live with the pain of $25K to end a 2 year Odyssey. $172K, I could not!

    I will try to do that this weekend, and if you don’t see it there by Monday, post another request, and tell me to keep my commitment, will ya! 🙂

    Thanks for asking…

  39. @ kiro,

    Ok… Your request has prompted me to finish what I started over a month ago, and that is to load my entire OVDP correspondence file in this thread,and not just my letters to Shulman. They are all denoted as Exhibits which were referenced in my second letter to the Commissioner. I have also added some additional correspondence that followed through out my TAS appeal, receipt of the final 906, and the parting shot to my examiner when I was all finished. Last letter of November 15, 2011

    As you requested, I loaded a copy of the appeal that TAS did on my behalf to my Examiner’s office. You will find that it is Exhibit S. Hope there is some language there that is beneficial to you, as it was written by an TAS attorney.

    Auditing tool:
    To anyone else that is in the OVDI and is bothering to read this, I have added one Excel tool that might be useful for you. It is a reconciliation workbook, to compare your records with the Examiners works on the 4549-A paper document you will probably receive. You will find the link to download it under Exhibit I. When I first got that piece of paper in the mail, I realized that if I were going to have a meaningful discussion, I would have to recreate it in a spread sheet, and have columns for her figures and then mine with differences shown with explanations, otherwise the entire discussion would get very confusing. Frustrated that this dinosaur of an organization can’t just send excel spread sheets back and forth by email, but my examiner insisted that they could not. So, I had to do this extra work, print it up, and then mail back. I have to wonder how expensive this would have been to have a CPA do this.

    One final thought before I hit the sack, and that is the method of calculating the highest Aggregate balance. I found coming up with something that I and an Examiner could follow for fund flows between normal checking and savings (term deposits) somewhat tedious to do, as you wanted to be sure that funds were not counted twice.

    Not sure how anyone else did it, so I spent a lot of time creating a spread sheet. If you just turned this over to an attorney or a CPA to do for you, that would have had to be VERY expensive clerical work too. If anyone is interested, I might redact mine, as an example someone else might find useful. Maybe not, as it is almost too complicated showing first NZD/AUD FX then the conversion to USD to come up with each years highest aggregate. It took a lot of fiddling around to do it right for each year, and reflect accounts that had opened and closed over the 6 year period, and then summarize. Anyway, on request, I might put some energy in putting it up here.


  40. @Just Me,

    More generosity from you in helping so many. Thanks for all you do here.

    Could you not SAVE AS the Excel spreadsheet (or whatever other document) as a different name — and then delete all of your personal information? Might work.

  41. @calgary411.

    I would just like to see Minnows avoid huge attorney fees when they can write their own letters or do their own spread sheets. Also give them some examples of how you have to document everything you do with these guys. As for the Whales, they aren’t reading here anyway so they can pay the money, as a commodity it probably has less value for them. Besides, the attorneys need it to pay for their administrative staff and life style. I don’t begrudge that, as they are a business like any other which thrive off US tax and statute complexity, but I could not afford it, or maybe better said, I did not care to pay it. It is kinda like why I don’t buy Apple products, the premium is too high, in my opinion, for what the product is.

    As for the spread sheet….Yes of course I can do that, and essentially that is what I did for the reconciliation spread sheet form 4549-A and then locked down the cells with formulas so they don’t get overwritten.

    It is a little more problematic with the spreadsheet for the highest aggregate balance, as you probably need examples in it to make sense. I had to use a lot of drawing arrows to show fund flow and other indicators if the highest balance wasn’t just at the end of the year. Anyway, I might work on something as time permits…

  42. Just Me

    Thanks a lot for uploading your letters, particularly the TAS letter. One question — did you have a protracted negotiation between the submission of TAS appeal and your response ? I gather from the letter that the IRS offered 100K or the like ( I can’t believe they thought that was a serious offer) and you came back with 25K. Was there a protracted negotiation in which you proposed numbers and they came back with other numbers ? And whom exactly were you negotiating with ? The examiner’s manager, or this so called opt out committee ?

  43. @kiro…

    It depends on how you define protracted. Rough timeline as follows:

    ~8th of July – The TAS issued the TAO to the Examiners office

    ~1st of August – It probably took the Examiner until then to responded with all the files and a proposed lowering of the OVDP penalty from $172K to $115k. (Could never figure out her rationale for that number from the spreadsheet she created).

    5th of August – TAS countered with the $25K penalty or $5k per year per unified FBAR.

    August 18th – the Examiner and presumably her Manager accepted.

    So it took about 5 weeks from TAO to TAS counter offer accepted. Then it took a while for all the paper work to be completed.

    I don’t know if they had to clear this acceptance with anyone else in the OVDP Regional Management group or not. Never said but given the time it took, I am sure it went through some approval process.

    Then the next step of document review and finalization took a while.

    August 23rd We sent a check for $25K to Examiner office.

    ~Sept 3rd We received the 906 and a form 13449 for our signatures.

    ~ Sept 7th We signed the 906 and the form 13449 (Agreement to Assessment and Collection of Penalties under 31 USC 5321) That is where they detailed out the $5K penalty per year for Non Willful failure. I probably should make a PDF of this form and add it to my uploads so others can see what it looks like.

    It was kind of interesting, as they frankly fudged the form preparation and it was not accurate at all. (Wonder if there is some penalty for them for willful falsifying or fudging of documents.)

    To come up with a $5k per year amount, they choose 3 of my savings accounts (term deposits) of the approximately 25 I had over 6 years. Then they assessed a penalty of $1667 per account to come up with the total of $5K. It was a silly construct to meet the negotiated terms they had accepted from the TAS. The Examiner called me in advance to tell me it wouldn’t make sense, but it was how they had to do it.

    Also, the 906 was not accurate as I pointed out in my letter back to them, but when it comes to their form preparation, there is not the penalties on them for willful inaccuracies as there is on us on the FBAR. I just signed it, even though in error, with a ‘W’ style “signing statement”!

    Then there was another wait… It took quite a while for the final executed 906 to be issued, as it seemed to require some Technical Adviser acceptance and other officer approval. There was a little worry that they might renig on the agreement, but it finally came through.

    Nov 3rd We finally received a letter from the Technical Adviser with executed copies of the 906 signed by the examiner, her manager and a reviewing officer (different from the Technical Adviser) whose name I could not possibly decipher, and the name was not printed out.

    So July 8 – Nov 3rd. TAO to final signed 906. It then took until about Feb 1st, to get the refunds from the reconciliation of taxes overpaid.

    So, is that protracted? You be the judge.

  44. Just Me

    Thanks again. My question was, if you will slightly different — I was asking if there was significant interchange (possibly verbal) between you and the IRS (with TAS serving as ‘honest broker’) negotiating over penalties, with the IRS proposing one number, you coming back with another and so on, or did the IRS essentially accept your 25K offer (or did the TAS officer suggest 25K to you as a sum that might keep the IRS happy and end your travails) ?

    I am not asking purely out of voyeurism or the like, I am trying to figure out how much negotiation is possible when debating penalties. Starting with an offer you can live with might mean you get pushed up when the IRS counteroffers, but starting below what one can accept might lead the IRS to pick its toys up and exit the negotiation. its similar to all negotiations, of course, but its unclear whether the IRS would unilaterally exit the negotiation in a huff. (the sums involved in my case are small enough — although not small to me ! that hiring a professional doesn’t make sense. )

  45. Kiro,

    As in any negotiation, you should start low, and I didn’t start as low as I should have. The IRS wasn’t going to just walk away, I don’t think, but it all depends on the spread, I suppose. Your OVDI penalty versus what you think you can live with. If yours is small, then keep your first offer very low. Nothing, but a letter of “go and sin no more” and an accuracy penalty.

    If your OVDI penalty is $1 Million, it is a little harder to make that offer.

    I must admit, that I sort of turned the negotiating over to the TAS, although we discussed it a fair amount. It was they that suggested the $25K after the IRS had decided maybe they could lower the $172K to $115K in response to the TAO. In retrospect, I should have been more forceful in my bottomline. You do have room to negotiate, and my mistake going in was not telling the TAS specifically what I thought was appropriate. They said they were going to counter with $25K. What I should have said, is that I thought I should have had no FBAR penalty, except the 20% accuracy penalty. That is what I would now recommend for Minnows as the starting point.

    But, I didn’t set that expectation with the TAS, so they countered the IRS offer of $115K with the $25K amount. They thought that was doable, given the atmosphere at the time, and how high my OVDP penalty was. I guess I did not have to accept it, and could have said no, but at the time I was under a lot of stress and anxiety and was looking for anything that was better than $172K. So, in anchoring terms, the $172K made $25K look great! Now it feels like I Ieft money on the table, but so it goes. Some poker hands are better than others.

  46. @JustMe

    I read your entire account. I must say you are a patient man. It must have been tough 800 days of your life. Kudos to you for persevering..

    I am curious to find out why they included the value of your house in the OVDP penalty aggregate. Also, I am new to this forum, would mind expanding the acronym TAS for me?


  47. Nate…

    Patient or stupid, I don’t know which. Certainly naive, but well educated now!

    In the 2009 OVDP and in the OVDI, assets are including in the penalty basis for figuring your highest aggregate balance. In 2009, the FAQs said that if the asset produced income it was to be included. My house had some non substantial holiday rent, so that is why they included it. It was something that I and the attorney advising me missed in the FAQs, focused as everything else was on the accounts which I did not know FBARS were required.

    The entire practitioner community complained about it, but the IRS did not respond to those complaints.

    In the 2011 OVDI, they have dropped the income aspect, and just said assets period have to be included! Their fear is that people will have moved money out of accounts into assets, and so they are going after them to. Their focus was the Homeland evader, but if you live overseas, it is natural that you would have assets, just like you do in the US. That really makes the OVDI a killer for Minnow compliance

    TAS, is Tax Advocate Service, and they are the best kept secret at the IRS. I should go back and modify my references so others have the clarity. I get too used to acronyms, I guess, and I should not assume that others know what I am talking about.

    You can read more about them and their mission here..


  48. @JustMe,

    “In the 2011 OVDI, they have dropped the income aspect, and just said assets period have to be included!”

    What do they mean by ‘just said assets period have to be included’? I bought a house in Australia 2 years ago. I had around 1000 dollars
    of unreported rental income(I have paid the Australian taxes for this amount). Does this mean that the value of the house is included in the aggregate
    calculation? If so, will it for the entire value of the house OR just the portion I have paid the principle for?


  49. Nate;

    Sadly, as I understand it, it will be the entire value of your Home, and not just the principle portion, that has to be calculated in the highest aggregate balance. That is what I had to do, but there could be some differences that I am not aware of in the OVDI. You might want to get an attorney’s opinion on that FAQ.

    In the OVDI, it doesn’t matter if you had some rental income or not.

    Here is what FAQ7 says…

    Pay, in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty, equal to 25% (or in limited cases 12.5% (see FAQ 53) or 5% (see FAQ 52)) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;

    Here is the link reference…

    It is really a rotten provision, and something that is a deal killer when it comes to Minnows that want to be compliant. The “in lieu of penalty” structure of the OVDI is designed for Whales, and as such, it is beyond the pale for Minnows. Or as they say in Australia, “Over the Top”. That is why one has to think long and hard about whether or not this program is appropriate for you, and if you should join, or pursue other strategies. You have to somewhat ignore the dire warnings and extreme examples of penalties the IRS lists in it’s FAQs as a bit of fear mongering. It is unlikely that those penalties would ever apply to a Minnow, but that is just my opinion now.

    You might want to read this post by attorney Michael Miller..


  50. Having just read your entire case study, Just Me, I am in complete awe of your tenacity and your ability to process such detailed information. (My head was practically exploding as I was reading.) Hopefully I haven’t mixed up something in my understanding of your long ordeal but it seemed to me you submitted FBAR forms all the way back to 2003 using the standards of reporting required by the 2009 form. From 2007 backwards the FBAR required reporting a bank account number and a box tick indicating the size of the account in a range of say $10,000 to $99,999 or $100,000 to $1,000,000. It did not ask for a specific amount back then as it does now. Were you not allowed to use the FBAR forms from 2003 to 2007 which people who filed those years used?

  51. Em,
    Maybe scorn for my stupidity would be a better expression… LOL
    I am in awe that you read the damn thing. Thanks for making the effort. My head splits when I look back at it. There are many other minnows that I have come to know who are still going through this, and unless you have done it, it is hard to commiserate with what it is like. I feel for them. There is a big cost in time (LCUs) that never shows up on a reconciliation spread sheet when you come to the end of the process. The IRS will never acknowledge that cost which is as significant as the $$$ they lawfully pick your pockets.

    With this case study, I just wanted to show those who care to know what you go through when you join this type of program. I hoped it would highlight all the work and LCUs it entails, but also show that anyone can do it given a willingness to preform the drudgery. Your alternate choice is to pay through the nose for a practitioner to do for you what you could do for your self, if you have the inclination.

    As far as the FBAR forms go, when I filed them for the first time, I used the most current FBAR form. To be truthful I did not think to look to see if there was a different form for 2003 than there was for 2008. Ultimately it did not matter. Using the Standard format OVDP request example, (Exhibit A) you had to check a box showing the range of your highest aggregate for each year. That meant you had to do some prep work to know, and to be sure you weren’t double counting funds that might have transferred. Also, since you were required to produce and submit all bank records for each year, there would be nothing to gained or hidden from using an older form. You had to do the work anyway to figure out your sums by year by account.

  52. Ah, Just Me, now I see what happened. You are so kind to reply to my question so quickly. I hope it only took a small portion of an LCU to do that. This site is a great resource and I wish I felt comfortable enough with prying eyes to share my story … perhaps later if derring-do ever overcomes my despair at the complexities of the IRS rules. It seems everyone’s story has a twist which the IRS doesn’t address with much if any clarity.

  53. Em,

    I understand entirely why one doesn’t become public about this. It took me a long time, and over opposition from my wife, I decided to share what was happening in the program. Maybe someone can learn something from it. Certainly not the IRS, as that bureaucracy seems incapable of learning, but as individuals hopefully someone can avoid a “footfault” if they read my story.

    Like I have said other places, I am in the ‘Complain by Comply’ mode, but I don’t wish the OVDI on anyone. Utimately each has to make that determination for themselves. I now see this program in the context of a Bigger story that is constantly evolving with an uncertain end game, but it is beginning to look like more and more there will be a Global FATCA regime created (credits to Blaze for coming up with the acronym-GATCA).

    Not to worry… I haven’t expended much in the way of additional LCUs. A least now, in response to you, the LCUs are voluntary, and not coerced as the IRS loves to do while mislabeling their processes as “voluntary’! They are very good at language abuse. 🙂 I think they take lessons from Frank Luntz.

  54. Just me,

    I admire all your efforts in helping other users with undertanding the process. Reading your complete account left me in total awe.
    You are probably the best thing that happened on Jack’s blog and now here! God Bless!!

    I have one question. You mentioned that you had more than 25 accounts after including the roll-in/out CDs. In 2011 OVDI, if taxpayer had more than 25 accounts, then there was different procedure of submission. I am not sure if it was same in OVDP2009. If yes then did you have to summarize them to stay within 25. Please do not answer if you will not like to share.

    Thanks a lot.


  55. @George…

    Thanks for your comments here. Really appreciate it. If someone gets some value out of it, that is great. It makes my LCUs not seem such a waste.

    To be truthful, I have not looked at the 2011 FAQ in compete detail as compared to the 2009 process to see exactly how they are different. I am certainly aware and know of the technical threshold changes they made as the program evolved to accommodate all the Minnow that they were netting. I am not sure what you mean by summarize.

    I did not summarize anything. If something had a separate account number, even if it was just a suffix 2 digit addition to the core account number, I listed and showed them all separately. Does that answer your question?

  56. Just Me, thanks for your response of MARCH 22, 2012 AT 4:35 AM

    [I had been meaning to respond earlier thanking you, and finally got a chance to get around to it. ]

    Indeed, given when you opted out, it must have been a far more difficult decision, since there was absolutely no transparency about the process (not there is much now, but at that time it was much worse). A penalty of 25K is a reasonable drop from the absurd $172K. It remains to be seen how the IRS will process my desire to opt out. I am not at that stage yet.

    In your case, it seems like the agent in question did a pretty thorough examination. My agent seems nice enough, but he seems to be fairly casual although he has asked for bank returns (I am a minnow too). He did say that a full examination could be initiated if I opt out (I think he meant US accounts also. Not that that bothers me by itself, I have only wage and some investment income, all taxed, but it would be a headache to dig up past returns. I gather your agent did not ask for US accounts.

    I am still hoping some sort of negotiation process is possible on opt out. I would assume so, but we” have to see.

  57. @Kiro..

    No, my examiner did not ask for US accounts.

    They do throw around the “full audit boggeyman” that practitioners used to scare minnows into the program. Frankly, once I was in the program, that did not scare me. I had approached this entire OVDP as a “full audit” and examined my records and my tax returns as if I were an auditor, saying… “What would I be looking for, and could I answer the question?” When I got a “yes” answer to everything, my opinion was “Have at it! Waste your time if you want. You will find nothing.”

    There is a lot more transparency now, but not thanks to the IRS. Practitioners are reporting good results. There was just a new one recently reported here…

    Jack TownsendMar 27, 2012 11:52 AM
    To Readers of this blog:

    “I just wanted to report that I just got news of an outstanding result on an opt out. ……..”

    Read more here.. you will have to scroll way down and “load more comments” to get to it…

    As for the Examiners. Mine was nice enough too, and full of chuckles at my lampooning jokes! Still, she was constrained by a very “black and white” attorney who was the technical adviser. He was the man behind the curtain exercising the control. Never got his name, as they didn’t pull back that curtain. Even her manager could not override him.

    Good luck. I think you will do fine in the Opt Out. Just too bad you have to go through all the front end crap to get out on the back side with less pain.


  58. Pingback: Tax Roundup, 4/5/2012 « Roth & Company, P.C

  59. Just me

    My agent actually said that the case might be referred back for criminal investigation, which I thought was kind of funny. In fairness he did not seem to be trying to scare me, and he did suggest that I was arguing over small amounts, and I might want to get it over with.

    Oh, and you said the technical adviser was an attorney ? Is that really so ? I got the impression they were just IRS agents with some background in specific topics. The reason it makes a difference is that an attorney may have a better idea of the legal rules that constrain the IRS outside of the program and may be more willing to settle .. Wishful thinking maybe.

  60. @Kiro

    Referred back to CI? How silly! Unless you were really engaged in some willful evasion of the Whale variety, I would just dismiss that is trying to scare you to stay inside the program so they can collect their penalty without further thought or fuss. Like I have said previously, my examiner couldn’t understand why I didn’t pay up and send a check like all her other Minnows did. Similar suggestion of “paying up and getting it over with.” Take your medicine and move on! Well, that medicine was too bitter for me!

    As for the Technical Adviser, that is what I was told, but like I said, I never got an opportunity to interact with him. I did talk with the examiner’s manager several times, as they did try to have my house removed from the highest aggregate balance, but the technical adviser would not let them.

    As for the legal rules that constrain them, they know the provisions of the IRM as well as anyone. The TAS attorney was the one that really knew what restrained them. Again, if you were just a benign minnow without egregious willful facts, my reading is that you would probably do better in the Opt Out. If there is any criminal risk, then staying in is probably the better option. If you think you have any, then I would consult with a good OVDI practitioner prior to making the final decision.

    BTW, I was reading over at Jack’s that there are folks from the OVDP that are still in the program, and everything seems to be moving very very slow. You can read those here, but you will have to scroll all the way to the bottom…


  61. @ Victoria.
    A tax attorney also advised me to file 3 years of amended returns and FBARs for small accounts (less than $20K).
    Would you mind elaborating on the letter you received from the IRS? Was it a warning letter for not having filed previous FBARs, or was it related to an audit?

  62. Just Me

    One comment — a couple of your docs have your name and that of your agent. I doubt its any great secret since you gave an interview, but just to let you know.

    Does the IRS actually have to follow their Internal Revenue Manual completely ? If it represents a Supreme Court decision or a congressional law, I suppose yes. But otherwise ? I gather from your comments they said your violation was considered willful ? How could they say that when the standard of proof is very high ? Or was it just a case of their having not clearly worked out guidance for such matters, since this is relatively new to them too (mostly I guess they dealt with clear tax cheats). Did the lawyers you talked to say that they were over-reaching or something ?

    Thanks, again

  63. Thanks Kiro…

    I am pretty public, so it is no big deal. I tried to redact everything, but probably did miss something as I did them all late one night. If you point out which one, I will pull down and try to redact it further. I should protect my examiner, at a minimum. Thanks…

    Yes, I think they do have to follow their own IRM. My examiner was the one that kept insisting by her narrow reading that I was “willful”, and that is where we had a strong disagreement. This was in the context of what she would say to the managment committee if I “Opted Out”.

    Again, that was her opinion, in spite of my arguments to the contarary. Although, in fairness she was somewhat sympathetic and tried to qualify it as not the same degree of willfulness as the Whales. Of course, if that assertion were to prevail, they would have had to prove it, as I would have appealed. I would not accept that finding. In that case, the burden of proof was on them which is a high standard that they could not possibly win. I wasn’t willful, period.

    I do think you are right though, she was new in dealing with this, and it was assumed by the IRS that all entering the program were willful Whales, and deliberately hiding by not filing FBARS. Couldn’t be farther from the truth…

    As for attorneys, they didn’t say one way or the other, rather they tried to help me think like an IRS examiner so I could counter their “black and white” thinking. They can be pretty literal and technical as that is their mind set, (if an amount is $75K one penalty applies, and if it is $75,001, then a different penalty applies. No de minimis consideration.)

    Ultimately they are not judge and jury, so that is why the IRM tries to help them see that there is nuance in “willfulness” vs “non willful” behavior. It doesn’t rest on one thing, but on patterns and that is hard for some examiners to deal with, especially if there is something in their cultural make up that effects their rigid audit view. My examiner was an immigrant and I sensed it effected her back ground perspectives. Nothing wrong with that, you just had to be aware of it, and try to counter it. She became very defensive when questioned hard by the TAS attorney as to how she was arriving at her conclusions. I didn’t hold it against her, I just had to deal with the “examiner hand” I was dealt.

  64. Just Me

    Thanks again. Exhibit K is the one that has your examiner’s name.

    As far as I understand from the IRM:
    “assertion of separate penalties for multiple violations with respect to a single FBAR form should be considered only in the most egregious cases”

    But other reports I have seen on Townsend’s blog indicate that the IRS did try to apply such penalties (although at a reduced level) for some other
    people (per account for a form). It still came to less than 10K, but the cases didn’t seem to be egregious. Thats why I asked whether the iRS needs to follow the manual.

    I also wonder (and I know you can’t answer that) whether one can actually try and negotiate, or the offer you make can be rejected by the IRS and thats it. In your case, there was apparently some negotiation, but not that much.

    Also, it looks like 2008 was not included in your penalty although you couldn’t submit an FBAR in time ?

  65. thanks Kiro..

    Will check out K again and redact more..
    Thanks much

    Here is something I just posted on Jack’s blog related to someone struggling to figure out what the penalty would be in an Opt Out and taking the IRM guidelines literally…

    Again, just my novice opinion, and you have to decide whether or not it is right or wrong… As Jack has rightfully said, “I am not perfect!” 🙂

    You can read more here...

    To anonymous Apr 19, 2012 11:24 AM, who is trying to figure out all the mitigation charts of the IRM and penalty applications…

    I would not get too hung up on them…

    Regarding (07-01-2008)
    FBAR Penalties

    I would focus instead on paragraphs 3, 4, 5, 6 and the later part of 7.

    In an Opt Out penalty negotiation, and that is what it will be, you would want to be drawing your examiners attention to these paragraphs.

    The penalties are not black and white like they are inside the OVDI. The IRM is practically screaming at the agent to be reasonable, and not get carried away with an inappropriate (absurd is my characterization) penalty…

    Read these carefully…

    Item 4. Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future.

    Item 5 FBAR civil penalties have varying upper limits, but “no floor.” The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.

    That means even if the chart shows a penalty of $XXXX amount, that is not a floor. It CAN BE less! The agent is only limited on the up side. They can NOT exceed the amount, but they can certainly lower it.

    I would remind you that those charts are “guidelines”. Guidelines are not FIXED and RIGID. Also, the penalties are not supposed to be absurd, and double counting account transfers or assessing a penalty for each of multiple small accounts would result in absurd penalties.

    Read item 6. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. Because FBAR penalties do not have a set amount, IRS has developed penalty mitigation “guidelines” to assist examiners in the exercise of their discretion in applying these penalties. The mitigation guidelines are “only intended as an aid” for the examiner in determining an appropriate penalty amount. The examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case.

    So, relax a bit. I do believe agent discretion for minnows in an Opt Out will not be as black and white severe as you are trying to determine from those guideline charts. That is what I learned from the TAS negotiation that occurred on my behalf. My final amount did not fit neatly into any of the chart guidelines.

    So, yes you can negotiate, and if you don’t like the results of the negotiation, (you think the amounts are absurd for your so called crime) you can still appeal. Then if the appeal turns out badly, you can still say, “ok…Then go get a judgement to collect.” Remember this is a CIVIL penalty and they have to sue to collect. The IRS then has 2 years to do that, but if it isn’t worth the effort, they will settle for less, is my opinion. And if they decide to take you to court, you can still pay up at that point, and you have held onto your money until then. Maybe you have a better use for it than the IRS.

    To your other question about 2008. It was in the penalty calculation. I would have to dig out my files to check, but I think 2003 was not included as the FBAR statute of limitation had run by then, and I had not signed anything to extend it. I did have to sign, under duress, the 2004 SOL. But of course, the IRS would characterize it as voluntary! LOL

  66. Just Me

    What bothers me is that your agent decided your violation was willful, even without any evidence to prove it. Even with mitigation, those penalties can be quite high. I suppose one can appeal to the manager and technical advisor, but that may mean more delay.

    It may have been lack of experience on your agent’s part, but my agent seems inexperienced too. he didn’t know what would happen on opt out clearly. He didn’t seem to have handled any OVD cases.

  67. @Kiro…

    Yea, well that is the luck of the draw when it comes to agents. Some are experienced, and some are not. I do bet that a lot of them are green, and do not have the experience level that comes with dealing with these types of examinations in the past. They have been indoctrinated to believe everyone entering the program is a criminal just trying to obtain a “get out of jail free card”. It skews their view of the world. Frankly, many have never really used the IRM guidance before, and by the time we came to the end of the process, I knew the IRM better than the examiner.

    The one I had, was culturally pre-disposed to see everyone as willful, in my opinion, and then backed up with a real black and white Technical Adviser it was tough to get through to her with nuance and argument. She just wanted me to pay up like the other 25 minnows she was dealing with. It took the TAO from the TAS to stimulate a new willingness to negotiate and see things differently.

    “Willfulness” is a high standard to prove, and frankly was totally unsustainable. You almost have to call their bluff on that, as they (or their manager) know that there was no way a DOJ attorney was going to waste time trying to prove something that deals in “state of mind” issues as well as well as a hard evidential proof just to collect a penalty from a Minnow. It is not worth it!

    If you were not willful, and just benignly negligent, then I don’t think you have anything to fear.

    Ultimately they backed off it, and went with the “non willful” finding, which was the correct one. The final penalty was too high, and still an injustice, but frankly at that stage this was just a negotiation, and at some point you cut your losses and settle just to get it over with. Two plus years is enough!

    I don’t think the money they got out of me, covered their administrative expense. It has certainly cost them much more in negative publicity from my attempt to strip the process of some of its opacity, so they don’t intimidate other minnows so much. I know there were a lot of them, that were taken to the cleaners until finally a few us of said, this isn’t right, and tried other means of dealing with the program.

    With every minnow who doesn’t accept the “one size fits all penalty” and goes another route, I feel like I am stripping them of their much trumpeted success. It feels good to know they are losing, and also know that they don’t get it. Such a short sighted approach to compliance deserves the disdain that I have for it. It is worth the effort that I put into showing others there are alternatives then being turned into fish fertilizer.

    …and to your last comment… De nada


  68. Just Me

    it looks like your agent was trying to browbeat you into admitting your violation was willful. That sounds quite unfriendly to me. Once you admit willfulness, you can’t opt out. Did she claim violation for all years, or just one ?

    I gather you didn’t write a letter indicating why you weren’t willful (although the burden of proof is on them, of course), just mentioned it in a phone discussion.

    It bothers me that an examiner can claim a willful violation even though they can’t possibly sustain it.

  69. @Kiro…

    Well, I don’t know that it was so much of brow beating, a negotiating tactic, or just an honest disagreement as how she generally saw things. I had written her many times in my previous correspondence with my “non willful” assertions. Since those arguments weren’t getting anywhere with her, and since she wasn’t giving me FAQ 35 consideration, I went to the TAS with my problem.

    Actually, she was just trying to get me to sign the 906 and pay up like all her other Minnows had. I came to understand that. It is part of the game, I suppose. It did bother me too that she thought of me as some degree of “willful”, but in the end, it really isn’t for her to decide. It is just a negotiating tactic, is the way I came to look at it. It almost worked, as after 2 years, a certain fatalism began to creep into my thinking and had me start planning for the worst case scenario. Frankly it was my Auzzie wife that bucked me up, with adamant refusal to accept what was happening.

    Once the Opt Out became available, I read the procedures. I saw what was required and decided to confront her with the practical problems of the process that would create extra work for her. In spite of all my correspondence with my “non willful” assertions through out the entire process, I was unsure how she was really thinking until that phone call you mentioned. Up until that point, she was working in a non discretionary world, and pretty much dismissing my long letters. She was within the confines of a rigid program, and so from her perspective, it didn’t matter what I said up to that point. She wasn’t really giving it much consideration. I was in the program. It was voluntary. I must therefore be guilty, and she was just going to process me without thinking that much about it. That was the way it worked.

    So, since I was obviously getting no where, and I was thinking of going outside the process, I asked directly what would she find if she had discretion which the OVDP did not allow. I did that, because, I thought that if I laid out my facts and case for penalty mitigation consideration in the Opt Out, we would need to be in sync. If my representation of FAQs and assertions were in conflict with what FAQs and recommendations she would have to make, i.e., if we were in strong disagreement, she would trump me. Now maybe that is really NOT the case, but I did not know enough about the Opt Out at that time to tell. Remember, there were no reported Opt Out cases up to that point, and no transparency about the process. I thought my previous pleas on “non willful behavior” had resonated with her, but when I actually asked her directly what she would determine, I realized that she was holding to a “willful finding”, although she would admit that I was not “willful” to the same degree that the Whales were. It was not year specific, but a generalized finding that she holding to.

    I pointed out, that while I appreciated that she did recognize that I wasn’t a whale, (at one point she even said, that I shouldn’t have been in the program in the first place.) I didn’t see where there were “degrees of willfulness” provided for in the IRM, and not sure how that would help me. I was NOT willful, and so, I could not accept her “degree of willfulness” finding. Obviously, in the final TAS negotiated agreement, all ‘willfulness” was dropped, as in the end, it isn’t she who determines that.

    So, I wouldn’t get too hung up on what an agent thinks. Obviously it is better if you can help shape their opinion of you and get them to see it through your eyes and find you non willful. That makes the Opt Out decision easier, but an DOJ attorney is going to decide the real “willfulness” standard in the end, and that is a high hurtle for them to cross. If you really think you are ‘non willful’, stick to your guns, and not get too concerned about the examiner. They are just the first minor cog in the wheel, and they don’t turn the wheel of justice on their own.

  70. Just me

    My agent doesn’t seem to have thought much of my situation either. I think many may have the IRS mentality (having with dealt with lots of tax cheats) that all ‘foreign’ account holders are tax evaders.

    But I sent in a request to opt out, and am preparing an RC letter. One thing I did notice in your TAS letter — it mentioned that you were ‘not consciously aware’ of your reporting requirements. I was reading Jack Townsend’s blog, and he seemed to have a lot of discussion of ‘willful blindness’, conscious avoidance etc. etc. Could saying that one was not consciously aware of something lay one open to the charge of so-called willful blindness and hence willfulness ? I apologize since thats more of a lawyerly question and anyway it seemed to work for you, so maybe the IRS is more focused on the bottom line number rather than parsing one’s RC letter carefully.

  71. I don’t know which to do after reading all of what you have written here. (I have still to go through the letters and sheets that have downloaded). It was terrifying to read of your ordeal and at the same time I admire the way you have interjected humour in it too. In your place, I would have been one hopping mad minnow, but you have maintained your grace and generosity, even trying to find the human side of the IRS and your examiner who was bent on finding you willful. Gives me some guidance on how we should be going forward on this.

    And here you are still helping us minnows, who did not know we were minnows until just 3 weeks ago. 🙂

    I am doing as you suggested and trying to read up as much as I can and getting lost in all the sub links that pop up. At times it almost feels like I am preparing for college exams and the examiner is out there to fail me, however well prepared I am. :O

    Thank you soooo much @JustMe for taking the time out to pen down the minute details of what you had to endure “voluntarily”.

    While reading your file I came across the case of that immigrant who was penalised $14,000 for a $218 tax default. I feel, I am going to be in the similar scenario and that is giving me the jitters. Although I have never filed a Sch B(since foolish me was told by my ignorant accountant in my country that since I was paying taxes where the interest income was earned, I would not be paying interest here…) so no question of marking “no” on that form.

    I just wanted to ask you two things, if you know about them or feel like answering them.

    a) When you called up TAS, did they have any limitation on how much (unjust) penalty you were facing, before deciding to take your case?

    b) Have you ever come to know, being in this OVDI mess so long and on this and Jack T’s blog too, if TAS takes up cases of people who do QD’s and the IRS comes back for audit?

  72. @Emma: We’re learning from you as well. You say you are neither a citizen nor a green card holder, but have “significant presence” in US. Does that mean you live in another country, but spend several months per year in US?

    I don’t even begin to know what to say to help in your situation, but if your legal residence is elsewhere and you’re not a citizen nor a green card, why do you have to file FBARs or returns? I hope I’m not confusing you even further with my questions!

  73. Emma,

    Blaze asks a good question. If you are not a legal resident, I am not sure that the FBAR requirements apply to you. Maybe I don’t full understand your status. I am not an attorney, so not qualified to say one way or the other, but that is the first question I would want to get answered by an expert.

    Secondly, yes, it is a bit like cramming for a college course. I do think as the fog of all this begins to clear in your mind, and given the fact that you never ever filed a Schedule B before, you have some very good reasonable cause justifications for not knowing about the FBAR if you tax status really requires you to file one.

    Regarding your questions about the TAS… Generally they respond to help Tax payers who are running up against road blocks in the due process of dealing with the IRS. Penalty levels are not the consideration, lack of reasonableness, injustice or undue burden by the IRS is more the criteria.

    Regarding your QD question: We, or should I say I have no anecdotal reporting on this issue. It is too early in the game, and it would require someone to come up a blog like this and report what happened to them. The IRS does not offer up meaningful stats or insights regarding their audits, or even the Opt Outs that people are doing now.

    If the IRS decided to do a standard examination as a result of a QD, and if you are a minnow’s minnow, the odds are long that they would even bother. Given what little I know of you, the odds are probably even less if you just decided to file correctly going forward from the point of your discovery. Standard examination processes would apply, and standard IRM discretion should be the norm. If the agent doing the examination, was unreasonable or ridiculous with the FBAR penalties in-spite of IRM calls for discretion, then I am pretty sure the TAS would entertain an appeal if you were not getting anywhere. They are very sensitive to this issue, while the IRS Commissioner is not!

  74. @Kiro

    I guess I wouldn’t get too hung up about “willful blindness” issue. The IRS might try to prove that in a very egregious tax evasion case where they couldn’t make a “willfulness” charge stick and might try to prove “willful blindness” instead. But that would be a high stakes case, and with the DOJ put a lot of resources into it, and I doubt they would ever expend that effort against a minnow. That is a hard row to hoe, as they say and I would think the DOJ wouldn’t bother a minnow with such an effort. The reward is too small for the effort.

    The IRS is quite happy to just fall back on the non willful penalties, which still can be significant, and there is where you need to make your case for the greatest mitigation under agent discretion. By using the non willful penalties that our Congress so gladly gave them, they switch the burden of proof on you. And that is how the game is played, in my opinion. But, as you say, I am not an attorney, so my opinion comes with all the usual caveats! 🙂

    As for agents, within the IRS bubble, I think your assessment of them is correct. They see a lot of blatant tax evasion, and that effects their view of the world. Also they been indoctrinated to think that all that enter the ODVI with offshore accounts are willful cheats, no matter the lack of evidence sustainable in a court of law. They look at you as a self selected willful whale, and so they want their oil. Finally, in this program they are just non thinking processors. Critical thought is not part of their job description. Just follow the black and white rules. End of story.

  75. I am not a GC holder, but on a work visa and my GC is in process. And this mess worries me that that processing might be affected!!

  76. @Emma…

    I did some research on the “substantial presence” issue, as I was not knowledgeable on it. Here is the response I got from an international tax attorney when I posed the question…

    Yep. As soon as you stay too many days and trip the wire on the substantial presence test you are subjected to EVERYTHING the IRS can throw at you. Including the FBAR.

    What is worse is the income tax treaties don’t protect you. If you claim nonresident US status by using a treaty, that means you calculate tax liability in the USA. But you’re a resident for everything else.

    So know I know more now then I did before Blaze raised the question. Thanks for the learning opportunity. 🙂

  77. @Just Me: I.m even more confused now than I was before about Emma’s situation. I hope you have helped her to understand it.

    Some of this is affecting Canadian snowbirds and other frequent visitors to US.. Calgary411 forwarded this to me a while ago. http://www.taxandestateplanning.com/2010/06/articles/us-taxation/snowbirds-beware/

    This tries to define in lay terms the convoluted concept of “substantial presence” through the example of Mr. and Mrs. Sunshine.

    Friends who winter in Florida or Arizona have decided to spend future winters in Bahamas and Mexico instead. The sun shines there, too! Why can’t US see the lunacy of this?!?

    It’s Time to Get Out of Dodge! (OK, I’m showing my age again).

  78. I’ve said it before and I’ll say it again (it is a little crude), if Canadians know what’s good for them, they will get their assets and their asses out of the United States.

  79. @ Blaze
    We are not snowbirds but we have family members who are. I tried to read through that link you gave but halfway through my head started spinning and I couldn’t figure out where I was, let alone where my family snowbirds might stand in their “substantial presence”. Now I know how Dorothy felt when she woke up and she wasn’t in Kansas anymore. Question is, did Dorothy pay an exit tax when she went to Oz? After all, her return to Kansas was not a sure thing and Oz might have instantly upon arrival declared her a citizen and automatically revoked her US citizenship.

  80. @Em: Wicked Witch of the West to Dorothy: “Just try and stay out of my way. Just try! I’ll get you, my pretty, and your little dog, too!”

    Does that sound like anyone we know?

  81. @Em: Auntie Em said: “Almira Gulch, just because you own half the county doesn’t mean that you have the power to run the rest of us. For twenty-three years, I’ve been dying to tell you what I thought of you! And now… well, being a Christian woman, I can’t say it!”

    I’m not a Christian woman, so does that mean I can tell the Wicked Witch of the West whatever I want? Or, maybe you are Auntie Em now, so you can do it!

  82. @ Blaze
    I’d say go for it but I think you already have. I’m not an auntie, just Em (that’s me spelled backwards).

  83. @Em: Maybe if we put on Dorothy’s ruby slippers, click our heels three times and say “There’s no place like Canada,” IRS would live us alone.

    No, probably not. Instead, they would demand to know where we got the ruby slippers and seize 200% of the value

  84. Friends,

    This is a great site that I discovered recently.

    Understand that there are quite a few immigrants from India in OVDI. I will love hear from participants from India who had typical investments in India like NSCs, PPF, etc before coming here. Wanted to know how to report interest on NSCs. Since these are 6 year investments many have purchased 1 to 5 years before coming here. Since these will mature in 1 to 5 years after purchase how is the interest income reported. Does one report it in the year they mature and encashed.

    Will appreciate your valued opinions.



  85. @JK,

    Welcome aboard. I think there are some immigrants reading here and commenting from time to time, but probably the most immigrant questions and discussions that I have seen have been over at Jack Townsend’s blog. In fact, I seem to recall a similar question being asked there recently, but with a quick glance I couldn’t find it…

    I would think, and don’t hold me to this, but if you really have some instrument that you hold, but doesn’t mature and post interest for 5 years, you still have to report it, and do an estimated value based upon standard accrual accounting practices for the interest. Again, I could be wrong, but accrual based accounting is standard GAAP protocol, so would have to assume it would apply here.

  86. Well, I got my response from my agent to my opt out letter, saying that his manager wants to talk to me before I opt — phone call tomorrow. I thought I had already opted out with the letter (I havent’ seen my RC letter in), so I wonder if the manager wants to offer a settlement or warn me of all the dire consequences of dropping out. I might have a hard time controlling my temper if the manager offers me a litany of possible horrors that could befall me on opt out …

  87. and funny that it took an opt out letter to get a response, previously the manager likely would not have talked to me.

  88. @Kiro…
    Well that will be interesting to hear what he has to say. My recommendation is not to lose your cool, or make it personal, even if anger is boiling. Commiserate with him about the difficulty in administrating such a non discretionary program, and make him feel like you have empathy for his dilemma, as he is a victim too.

    Or maybe, he is going to make an offer, and there is a switch in tactics. It should be an interesting call. Whatever happens, immediately document the conversation and follow up in writing your understanding of what was discussed. Don’t be intimidated by any penalty hyperbole that he might use to keep you in the program. I would say, based upon my experience, it is SOP

  89. How do I calculate highest aggregate value?. See following example

    04/01/2009 $40,000 : New account opened
    04/15/2009 $500 : Withdrew money and spent it away in food/sightseeing. Remaining balance is $500

    05/01/2009 $50,000 : New account opened
    05/15/2009 $600 : Withdrew money and spent it away in food/sightseeing. Remaining balance is $600

    In year 2009, sum of highest aggregate values for each separate account= 40000 + 50000= 90000

    If I run a daily combined balance, I will come with a max aggregate value of $50000 reached on 05/01/2009.

    Which one is correct?

  90. @TaxPayer…

    For FBAR reporting, what I have done is look month by month at your account to determine USD highest balance in each account anytime of the year, regardless of any ‘in and out’ activity or money spent. It has nothing to do with a month end balance or spending which has occurred. It is kind of like the tide reaching a high water mark on a channel maker and then receding. The high mark is the highest aggregate.

    Now this gets a little more difficult when your account is expressed in another currency, and you are having wild currency swings through out the year, as a FX highest, and a USD highest may not be the same account amount at the same time of the year. Likely is, but maybe not, depending on account activity.

    Technically, to assure that you have determined a highest USD aggregate, you should convert all transactions and balance activity to the USD equivalent on the day it occurred to remove any currency swings which could might have distorted your reporting.

    So, for FBAR reporting,the highest amount you report, as sited in your examples would be: Acct 1 $50,000 + Acct 2 $40,000 = $90,000.

    Special Note: That is NOT the highest amount for purposes of the OVDI penalty, if that is the question you are asking? Under that program, you are allowed to reduce the highest aggregate to account for duplicate funds that might have transferred between accounts and were double counted in the highest aggregate. But, you can not subtract spending! (see note below from Michael Millar that for the OVDI penalty, you use the year end exchange rate (12/31/xx)


    Account 1
    04/01/2009 $40,000 : New account opened
    04/15/2009 ($10,000): transferred to acct 2. Ending balance is $30,000, but highest aggregate is $40,000

    Account 2
    04/01/2009 $40,000 : New account opened
    04/15/2009 $10,000 Money received from acct 1 transfer. Ending balance and highest aggregate is $50,000

    Highest aggregate for both Accts for FBAR reporting $40,000 + $50,000 = $90,000

    Highest aggregate for OVDI penalty calculation
    $30,000 + $50,000 = $80,000

    Make sense?

  91. I just skimmed some of the posts, but for purposes of calculating the highest account value, you should use the applicable foreign exchange rate on 12/31 of the given year.

    This rule applies both for FBAR purposes (see instructions) and for purposes of computing penalties under the applicable voluntary disclosure program.

    With respect to the latter, the following guidance is from the 2011 OVDI (and, presumably, will be continued in the 2012 program):

    “Q23. When determining the highest amount in each undisclosed foreign account for each year or the highest asset balance of all undisclosed foreign entities for each year, what exchange rate should be used?

    A23. Convert foreign currency by using the foreign currency exchange rate at the end of the year. In valuing currency of a country that uses multiple exchange rates, use the rate that would apply if the currency in the account were converted into United States dollars at the close of the calendar year. Each account is to be valued separately.”

  92. @Michael Miller…
    Thanks for the clarification. On my OVDI highest aggregate that is what I did, now that I go back and look at it. Is that true on the FBAR too? When figuring interest for purposes of reporting on the 1040, I convert on the day that the interest is posted, but now having doubts about the correct method on the FBAR. Guess I will go back and read the instructions, as I have yet to file by FBAR this year.

  93. I just read somewhere that for FBAR purposes, even when a couple is “married filing jointly” for their USA taxes, if they have joint offshore accounts(in my case they are in our native country), each has to report these accounts separately, even if they are repeated. When we report these accounts in our native country, we file returns or pay taxes as applicable based on who is the primary account holder even though we might have joint accounts – that is how it works there.

    For eg. I have an account and some CD’s in Bank A and my husband is the joint account holder on it with me. My husband has an account and some CDs in Bank B and there I am the joint -account holder with him. The account and CD’s in Bank A is reported under my name and the account and CD’s in Bank B is reported under his name.

    Here in USA, my husband is the earning spouse and I am the joint filer. Now for FBAR purposes – do we report both accounts and CD’s with joint names in bank A and bank B on BOTH our FBAR forms? ie. report the same accounts and CDs’ twice and pay penalties on the same accounts TWICE? That would just kill us in the FBAR penalties and it does not make any sense whatsoever!! How can one pay double fines on same accounts?? This is even more absurd, atrocious and illogical than I had previously thought. Our interest income in these accounts in not that much, at the max around 6K each in the last 3 years and the tax might not be that high, but the FBAR penalties would just be ridiculously obnoxious!!!

    Please, if someone has any kind of idea or suggestion, do share. I was unable to sleep before, now I am alternating between fear of the penalty abyss and anger at the unfairness and thievery of it all!

  94. @FuriousWhilePetrified

    Well, all of our accounts were joint accounts, and we only have filed one FBAR and both signed them. That did not seem to be a problem, as I went through the OVDP without any comment about this. However, all of our accounts were either just in my wife’s name, or both of our names. So she was the main owner, and I was the joint owner. Or at least that is how we filed, and I didn’t have a similar situation to you. We did not have a case where we were separate owners, with the other a joint signer.

    Now, I suppose it is possible I have missed something. Have you read the instructions on the FBAR? If I had owned an account separate from my wife, then I would have had to file a separate FBAR for that account, and list her as a joint owner for that account only.

    I wouldn’t worry about the IRS hitting you double for FBAR penalties. They aren’t that ridiculous, no matter how much they bluster.

  95. Kiro,
    (see Kiro’s post at May 17, 2012 at 5:55 pm ), how did the telephone meeting go, with the manager at IRS ?

  96. Taxpayer

    Turns out the meeting didn’t happen, manager was too busy and is out for 2 weeks for memorial day holiday or something. Not rescheduled yet.

    Just Me

    Your advice to keep my cool is of course great. It would be hard to do so if the manager mentions inappropriate penalties that they can’t possibly apply as a threat. I must admit it would be tempting to say — yes, lets see you do that, But I’m jumping to conclusions. I think they are likely graded by how many cases they can handle fast, and if they can avoid opt outs, so the manager may offer a settlement. Still unsure if I’ll accept one that is not reasonable. Being semi-retired, I have time to spend on going through appeals if needed.

  97. @Kiro,

    Well, if you have the time and LCUs to burn, then you might as well take what small pleasure you can by delaying and eating up their time and examiner resources with what appeals are available. I would drag out all deadlines and time frames to the last minute allowed. Look for every opportunity to audit their work, find mistakes, and make them correct it before you can proceed. Might has well make it as expensive and inefficient for them as possible, content in the knowledge that they will never get it! 🙂

  98. Just Me

    I am also in the program, contemplating opt out, with good facts, I think. Your notes are very useful. hopefully the process will be less frustrating for me. I understand from your notes that the IRS came back with an offer of 115K at one point. Did they tell you how they came up with that number ? Was it a %age of account size, using the IRM guidelines etc etc. ? Or was it just an attempt to browbeat you into accepting a very high number (a sort of negotiating tactic) ?

    Also, do you think your letters and messages to senior IRS personnel helped you at all ? Would someone without such letters be unable to get a hearing ? Did even the TAS listen to you more because you contacted them via your Congressperson (or was it via Americans Abroad) ?

    It also seems like you had a face to face meeting with your examiner/manager ? Did they try and grill you about your accounts at that time and ask why you didn’t file FBARs ?

    It also seems from one of your messages that you contemplated moving money back from NZ to pay the fine ?

    Thanks for any help you can give.

  99. @amr

    I can only hope and pray that the process is less frustrating for you than me, and that you have a positive outcome.

    I will take your questions in order….

    Did they tell you how they came up with that number ?

    The offer came via a note my examiner had prepared that was passed onto me from my TAS case officer. I looked it over with some detail trying to understand the logic behind the number. Frankly it did not make sense to me at all, and since it was unacceptable, I didn’t labor over it too much.

    Knowing my examiner the way I did, I think it was her honest attempt to apply some discretion methodology she discerned from the IRM, but I could not follow it. My guess, is that her technical adviser, who seemed to be the hard ass behind the curtain, probably had a hand in its creation. I don’t know that for a fact and am just speculating, but he was the one that was unbending on including my house in the penalty base to begin with. I do know she seemed anxious to come up with something better once she was under the Tax Advocate Order (TAO), and maybe this was just a first attempt, following his guidance, and not really an “browbeat” or “negotiating” tactic.

    Whatever it was, we (TAS and I) rejected straight away.

    Did my letters help at all? Who knows!! Maybe, maybe not. I do know they helped me organize my arguments, and release my frustrations, so that helped ME! LOL

    Actually, as I think about it, they did. My first letter to Commissioner Shulman, which was answer by Kevin McCarthy ended up opening an avenue for unofficial appeal outside of the examination process when I called Kevin a year later to remind him of his letter. He was the one that helped set up the conference call for me with Victoria Gally. Without his letter, in reply to mine, I would have had no one to appeal to above the head of my examiner’s manager, who frankly wasn’t much help. Seemed like a nice guy, but he didn’t go out of his way with suggestions or ideas about what to do.

    Also, my letters meant I had a very complete file of my correspondence attempts to reach a reasonable conclusion. This served me well when the TAS got involved. They could read for themselves and see the consistency of my arguments, and my attempts to reach resolution. They got it!

    So, the letters served a purpose, but not as directly as you would have liked.

    Did the TAS listen to you more because you contacted them via your Congressperson (or was it via Americans Abroad) ?

    I think there may have been some serendipity on why the TAS listened to me. They were fully aware and frustrated by the IRS FAQ 35 removal and abusive OVDP practices and maybe were looking for someone like myself to walk in the door. I think they had helped someone else prior to me, but not sure that many had gone the TAS route up to that time. Attorneys didn’t even seem to know it was available, and some pretty reputable ones then added it to their suggested options for OVDP impasse.

    I did not get any meaningful help from my Congressperson, although one Senator’s aid did send me a “release/authorization form” to fill out which they were then just going to forward to the TAS on my behalf. In the end, I didn’t bother with it, as by that time I was already in direct contact with the TAS. There was nothing else to be gained by their effort which is pretty much a “go through the motions” SOP for them.

    The idea and the contact details for approaching the TAS came to me from Jackie Bugnion at ACA who was sympathetic to my plight, and suggested this as a possible route for me to consider. She knew and thought highly of Nina Olson, and thought I might get a hearing if I contacted the TAS office. She was right!

    Did you have face to face meetings?
    No face to face meetings, just telephone and written correspondence.

    Did they try and grill you about your accounts at that time and ask why you didn’t file FBARs ?
    No! No need. It was all in my written correspondence.

    You contemplated moving money back from NZ to pay the fine?

    In the depths of my depression over the penalty, I did start due diligence for worse case scenario of how to raise the $172K without tearing open IRAs, or busting holdings in a depressed market situation, etc. That was just one option I was mulling over. Fortunately it never came to that.

    Well, I hope this answers your questions. Best of luck to you. I don’t know your facts or situation of course, but if you are a minnow, and there is no criminal exposure, I have come to the conclusion that Opting Out is the thing to do. It will cost you more LCUs and frustration. However with strong determination and a stiff back bone, with your fear fully in check, I have to believe, given the PR disaster the IRS has on its hands, it is going to bend over backwards not to be seen as bludgeoning minnows in the Opt Outs. They are quite happy of course to take your full OVDI penalty inside the program, so they can brag about all the revenue collected. They will do it without any moral qualms or twinge of conscience, but outside the OVDI, reason can and will prevail. I do think you will do better. If you haven’t done so, be sure to read Moby’s Opt Out. There may be some arguments there you can use.

    All the best

  100. @amr

    Just Me is right on with his advice. You should absolutely be opting out, with the target of zero FBAR penalties. I’m not aware of your situation (immigrant, expat etc) but you should be able to get some ideas from my letters.

  101. Moby, Just me: thanks to both of you.

    Moby, I read your well written letters too. I am an immigrant like you, but a few more years in the US, and maybe 3-4 years before the start of the OVDI period. I have read (and you mention) that the OVDI penalty is meant to compensate the IRS for money lost before the OVDI period. In your case, that was not an issue since you came to the US in the period. I don’t know if anyone can answer this, but I presume the reason the OVDI penalty is so harsh is that its meant to compensate for years for tax due before the period AND the possibility that the original funds may also be from non taxed income. Say a business owner skimmed off $1M in untaxed money from his US business in 1995-2000. In that case, losing 25% of it is a bargain (I don’t think the program asks you to pay taxes if the sum originally came before 2003). The significance is that in my case, the government should be happy with tax on income in my accounts earned in the 3-4 years after I came to the US, but before I became a US person).

    In my case, I would be willing to pay up to that in fbar penalties. I think it would be maybe $500-$600 more is all.

    Thanks again to both of you.

  102. @amr…

    I would just say, that you make a mistake in trying to logically assess why the OVDI penalty levels are set where they are. I am not sure that there is a straight line analysis based upon any rationale thought process. It is what they thought they could get, plain and simple. But, you are right, that the penalty is a bargain for real egregious tax cheat whales, if you believe that penalties are necessary for voluntary disclosure compliance. They could have just said, if we catch you outside the program, no plea bargaining will be done, we are throwing the book at you. However, if you voluntarily disclose, clean up your past, pay your taxes plus interest, you can “go and sin no more.” That is the result you want, as it is a reasonable result for anyone including whales if the Canadian Revenue Authority were running the program. 🙂

  103. Just Me,

    Your viewpoint is certainly valid. Although I think that recovering tax loss is certainly a factor in the IRS coming up with the penalty factor. And having started with 20%, they had to ratchet it up bit by bit to ‘punish’ people for not taking the 20% bargain offer !!

    I’m trying to figure out how much I need to feed the monster to keep it satiated. Compensating for all tax loss is I hope sufficient, and its a much smaller sum than the 25% — i assume that is meant to ‘compensate’ the government for decades of non compliance, lots of missing information returns, and possibly untaxed source of money in the first place.

  104. @AMR,
    I understand what you are saying, but I don’t make that assumption. Remember under the substantiality rule on amending returns, if you try to send them money for under reported tax beyound the 3 years of SOL, which represent less than 25% (I think that is the number) of the under reported tax that was due, they will just send you a nice letter refusing to accept it, and tell you you can apply for a refund and get it back (probably hoping you will not).

    I have one of those letters in my files somewhere that I hold onto just for the amusement it caused me during the OVDP. They didn’t want my money at first! I was tempted to apply for the refund just to mess with process, but knew that the Examiner would want it when she got around to the reconciliation calculations, so let it be.

    So, you are reaching back way way way too far in your “rationale” analysis.

    I would just be considering something like Moby did, and offering the Tax, interest and maybe a 20% accuracy penalty as your starting point if you want to feel better. This really is a negotiation at this stage, and so you shouldn’t be offering too much. They might take it, and if not you can come back with something a little higher, like $500 per unified FBAR per year as your second offer. But don’t go into it trying to think logically. Think like a negotiator instead..

    You aren’t going to offer $500K to a Bank today for a repossessed house that was appraised at $500K in 2007 just to compensate the bank for it’s loses on its loan in the intervening years. You are going to offer them the minimum that you think they may take. It has nothing to do with the value now, or value in the past, it is strictly trying to find what they will settle for now.

    They may want some “pound of flesh” for their effort, but don’t walk into the Opt Out as a supplicant. Approach it with a bit of indignation that they are putting you through all this, with insistence on your non willful reasonable cause argument (assuming you can construct one). I would argue that all you wanted to do is be compliant now and going forward and not subject to some draconian penalty for a benign failure. So, message to IRS should be, Mission Accomplished. I am now, and will be compliant tomorrow. Really just a letter from the IRS admonishing you should be enough, but like I said, if you want to throw them a crumb, then the 20% accuracy penalty sounds pretty reasonable to me.

    Now…I say this not knowing anything about your facts, and if there is any willful activity that might subject you to criminal prosecution, then I would not be Opting Out. You should not consider it as any legal advice or put any special attention to what I say. I could be wrong, and often have been when it comes to IRS non logical approaches to problems.

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