IRS OVDI: Holding the IRS to Proper Payment Application

To those reading here who are in the OVDI, I draw your attention to this Jack Townsend guest post by Asher Rubinstein, Esq.

It has been said that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) corrected many of the hiccups of the 2009 Offshore Voluntary Disclosure Program (OVDP)…… However, as more OVDI cases now head toward resolution, it appears that the IRS is again wavering in certain policy decisions, again to the detriment of taxpayers.

Why am I not surprised by this?


34 thoughts on “IRS OVDI: Holding the IRS to Proper Payment Application

  1. Nobody seems to know how to handle this. If you go around asking professionals (CPAs and Tax Lawyers) each one has a different advice. I ask myself: is this being done purposefully in order to “catch” people doing the wrong thing and charging them enormous penalties? I can’t believe that the IRS could do such a thing.

  2. Isn’t there a saying something like: Don’t ascribe to malice that which can be explained by stupidity? Ah yes, there is an entire page on Wikipedia about it which includes the following:

    “Many journalists have fallen for the conspiracy theory of government. I do assure you that they would produce more accurate work if they adhered to the cock-up theory.
    —Sir Bernard Ingham[6]”

    I am going to use this guest post as an example for my US relatives on how the IRS makes life a nightmare for expats.

    [OK I am totally unable to redline the reference above and make it lead to the URL. Sorry. It’s a post called “Hanlon’s razor”, probably a corruption of “Heinlein’s razor” after Robert Heinlein, a brilliant sci-fi writer with a definite libertarian bent.]

  3. @all: This was a good post with a lot of good information. I am posting here my comments to Mr. Townsend’s blog in case anyonen is interested.
    We are getting close to six months after receiving the preliminary clearance letter from the IRS Criminal Investigation Division and we have still not been assigned a revenue agent to process our OVDI applications. My guess is the IRS is absolutely swamped with OVDI requests and Congress’ mean-spirited and hypocritical cutting of the IRS budget is not helping matters.

    We also advise our clients to write separate checks for each year with an SSN written on the check and a written designation on the check indicating the year to which the payment is to be applied, and labeling what is for tax, interest and the 6662 (20%) penalty. The compliants expressed in the comments on Mr. Townsend’s blog arise from computer generated correspondence which is mailed automatically without any human input, but don’t let an IRS agent tell you there is nothing they can do about it because the field agent and his/her manager, can get control and jurisdiction over a taxpayer’s IRS account on the computer system they call IDRS and they can, and have a duty under the Internal Revenue Manual, to assist taxpayers in straightening out mistakes on each taxpayer’s IRS computer account. As for the 2007 SNAFU, I was told by an agent that the IRS “wants to show the big FBAR penalty in 2007” but there is no excuse for the misapplication of funds described on Mr. Townsend’s blog when a taxpayer makes a voluntary designated payment as the OVDI rules require.

    NOW FOR A TOUGH ONE: We have also been advising clients to submit checks for the tax, interest and the 20% section 6662 penalty BUT NOT FOR THE BIG 20%, 25% and now 27.5% FBAR penalty for a couple of reasons.

    1. In some cases we hope to opt out at the appropriate time so why tie up money we may not have to ultimately pay?

    2. The IRS is not rejecting our OVDI packages as non-processable nor are they rejecting them on the merits for failure to tender the big penalty;

    3. We thought interest only ran on the tax, interest, and the 20% 6662 penalty BUT NOT on the big FBAR penalty. I could be wrong, but somewhere along the way, the answer to FAQ number 7 was changed to make the big FBAR penalty a title 26 penalty (meaning under the Internal Revenue Code) as opposed to title 31 of the United States Code where the FBAR provisions are.

    What this means is interest is running on the big penalty too, presumably from 2007. Since it looks like an OVDI case is likely to take two years or more from start to finish, a lot of folks are going to be in for a big surprise at the very end when the final bill comes.

    We will be seeking clarification from the IRS as to whether or not inrterest is running on the FBAR penalty and we will advise everyone once we find out.

  4. @30 Year IRS Vet

    Thanks for the great comments. It helps getting your perspective and insight has how you are progressing with your clients.

    I note that Jack has been saying similar things as you, and when it comes to Opting Out, you might be consider reading what he is advising on the latest Opt Out thread he has running. There is some good information and advice there that I refer folks to who ask questions, as they try to figure out what the hell to do. 🙂

    1. Agree
    2. I have not heard of that either.
    3. My opinion is that you are NOT wrong. I can’t see how they can possibly be running interest on the “in lieu of penalty”, because technically it is not assigned until you file sign that 906. Let’s hope they haven’t changed procedures yet again in this regard. That would be stunning to me, wouldn’t it be to you? How could they change the penatly from one Title to the other without an act of Congress? Did Carl Levin slip in some amendment somewhere that we all missed? 🙂

    I am not as versed on the 0VDI rules as I was on the OVDP, but I didn’t think you had to, nor should you have sent in the ‘in lieu of penalty’ although I understand that some folks did. Personally, I think you were absolutely right to advise clients NOT to send in that penalty at application time, but I have no standing to make that assessment. 🙂

    Anyway thanks again for your comments. I might reference them to my Drudgery for Minnows thread, as they are very helpful.


  5. @Steven

    Your comments about the change in FAQ 7 is interesting – i.e. making the “in lieu” of penalty a title 26 penalty. This strikes as potentially dangerous for another reason.

    Canadians have the benefit of the U.S. Canada tax treaty which doesn’t require the CRA to collect an FBAR penalty (as an information return penalty). I would be interested in your views on whether by making the “in lieu” of penalty a title 26 penalty that the IRS could argue that it is a tax penalty and is not excluded by the treaty. The treaty means that the CRA won’t collect an FBAR penalty on anybody. But, only Canadian citizens have the benefit of the treaty on tax issues.

    I wrote a post on the “in lieu” of issue, leaving this question open.

    “The U.S. Canada tax treaty does not require the Canada Revenue Agency to collect FBAR penalties. Finance Minister Flaherty has confirmed that Canada will NOT collect FBAR penalties for the IRS. If you enter OVDI, you are paying a penalty “in lieu of other penalties”. In other words, you are neither paying nor being assessed an FBAR penalty.”

    Your thoughts?

  6. @renounceuscitizenship

    My understanding is that IRS has specifically communicated to CRA that FBAR is NOT covered by the treaty collection provisions. I suppose they could change their mind but the other thing you have to remember is there is very little public evidence that the collection provisions of the US Canada treaty have ever been used to begin with. For one thing CRA really doesn’t know from their own records who is a Canadian citizen or not to begin with.

    One thing that we might be hearing about in the future and is probably deserving of its own blog post is the MAP or Mutual Agreement Procedure administered by CRA under Canada various tax treaties including the one with the US. What is interesting is the latest US Canada treaty amendment now call for binding arbitration of disputes which MAY became quite interesting in the future. Here is a link to a report about MAP below:

    What is notable is CRA admits not all disputes can be resolved however the US Canada treaty since 2007 is now subject to binding arbritration. My personal opinion is anyone in Canada in OVDI should contacting the CRA MAP office NOW.

  7. @Renounce: good thoughts and I liked your blog.

    Point of clarification: The FBAR penalties are set out in Title 31 relating to money and banking. I believe Congress has enacted a specific delegation of authority to the IRS to enforce them which the IRS would not otherwise have because the jurisdiction of the IRS is derived solely from title 26 which is the Internal Revenue Code Information return penalties are also in Title 26.

    As Mr. Brown points out in the article you quoted, some of these penalties are “assessable penalties” which means the IRS does not have to issue a Statutory Notice of Deficiency (or 90-Day Letter) before assessing them which would give a taxpayer the right to contest them before payment in the United States Tax Court. To fight the IRS in court over an assessable penalty, it needs to be paid first. Then the taxpayer must file a claim for refund which if denied, after a chance to go to IRS Appeals, ultimately ends up in the US district courts.

    My office is currently researching the issues surrounding how the FBAR penalties are to be litigated. My understanding is they have to be paid first and there is no right to litigate them in Tax Court similar to the assessable penalty procedures under title 26 described above. However, there may be a way to litigate in the Tax Court (read: pre-payment) the question of whether the IRS may have abused it’s discretion by not abating an assessed FBAR penalty.

    An “assessment” means a liability has been formally entered on the IRS’s books giving it the right to make a demand for payment and then collect it upon a taxpayer’s refusal to pay. It is illegal for the IRS to assess any tax or penalty before a taxpayer has the chance to petition the Tax Court if the Code provides the right to do so.

    My comment above in this thread related to the question of when exactly interest begins to accrue. Under the voluntary disclosure programs, the 20% understatement penalty is assessed after signing the form 906 Closing Agreement, but interest on that penalty would then be computed from the respective year tax year to which it relates. Under the various VD programs, the Service assesses the FBAR penalty as of 2007 so presumably interest will accrue from that year forward.

    My only point here is the world of tax penalty administration is very complex and I would never rely on a politician’s prediction about what Canada will, or will not do on behalf of the IRS.

    Perhaps more importantly is Tim’s post above in which he wonders whether the collection treaty provisions are being used at all. I think we are a long way off before we see what our respective governments are going to do about collections in this area but I would guess that so far, no cases have yet been elevated to the decision makers In Washington where that question has been presented.

  8. Steve,

    While the Tax Court clearly is not an appropriate forum for the litigation of FBAR penalties, my understanding is that the Government must bring a case in District Court to collect FBAR penalties, since the collection mechanisms of Title 26 are not available.

    31 USC 5321(b) permits the institution of a civil action to collect FBAR penalties that have been assessed, and the implication is that this is the only way the Government may collect.

    The two Williams cases (one in the Tax Court, dismissing for lack of jurisdiction, and one in the district court) seem to indicate that the Government must bring the lawsuit to collect, although I confess I don’t believe either says so in so many words. In particular, I think the language in the Tax Court opinion was favorable.

    I would be very interested to hear what other methods you may determine to be available for the Government to collect. To my knowledge, the Government has never attempted to collect an FBAR penalty without bringing a lawsuit.

    Thanks in advance for any follow-up thoughts you can provide.

  9. Hi Michael!

    The whole issue of the IRS chasing after Canadians through treaties and foreign litigation is a red herring which is not going to happen. The IRS has enough trouble going after all the low hanging fruit it has in front of its nose inside the United States to even think of expending valuable resources on dubious, expensive, divisive and unseemly extra-territorial collection of routine penalties or tax outside the borders of the fifty States, the District of Columbia, or maybe American Somoa or Puerto Rico! The exception here might be a high profile tax evader where there are parallel criminal and civil proceedings. Under those circumstances, I could see DOJ paying special attention to some kind of international enforcement.

    I have a plain old IRS audit here in my home town of Sacramento where the IRS is looking at a local family whose names appeared on one of the lists the IRS received from one of the Swiss banks which decided to roll over after the brief but bloody war between the Department of Justice and UBS and other Swiss banks .

    My clients’ names showed up as joint signatories on a Swiss account set up by a rich European relative who simply wanted to facilitate frequent visits to the homeland by his grand nephews and nieces. I hope to convince the agent that although my clients would literally be required to file FBARs, the proper IRS response should be at worst a warning letter. If I cannot convince the agent I expect to have my clients pay the penalty and only then will I have the chance for a hearing at Appeals before my firm files a refund suit in the Eastern District of California here in Sacramento.

  10. @30 year IRS Vet,

    Just curious, and I am sure you have lot of good reasons for the strategy you mentioned above. Is there some other factors that don’t allow you to consider the “Opt Out” process instead of signing the 906, paying the ‘in lieu of penalty” and then attempting a refund?

    I am just trying to learn what thought processes go into “Opting Out” or not. Why not go with a standard examination and the IRM agent discretion. Then if you don’t like the FBAR penalty, require them to go to District court and collect it? Do you think the clients facts are bad enough that it is too risky?

    Again, just curious and trying to learn, for what reason I don’t know, as I am done with the darn process. Maybe there is something someone else could gain from your insights.

  11. Steve,

    Thanks for responding. I’m curious: what is the benefit in paying the penalty and suing for refund vs. requiring the Government to bring in action in district court? Maybe they do. Maybe they don’t.

  12. A few more comments:

    1. I received my first 906 under the 2011 OVDI. Interestingly, the IRS deemed the 25% miscellaneous penalty to arise in 2009. I think they’ll probably all be for 2009 this time around, because 2009 is a year that would ordinarily still be open under the usual 3-year statute of limitations.

    2. Interestingly, although the IRS credited the amount paid in a reasonable way (first to pay the amount due for 2003, then for the amount due for 2004, etc.) they computed interest through May 2012 with no allowance for the fact that a large payment was made in August 2011. So, the IRS is demanding an amount of interest that everyone knows is too much. The agent insisted that this is how it must be for reasons that made no sense. So, if my experience proves typical, taxpayers participating in the 2011 OVDI should expect to overpay interest, and then wait for refunds, for no particularly clear reason. Outrageous, in my humble opinion.

  13. @Michael Miller

    Regarding your number 2. Essentially that is what my examiner did, (and I argued with her about it) and it finally came out almost right in the reconciliation process. Here is what I said, with some modification at Jack’s blog…

    So why am I not surprised by this? Another item for Nina Olsen to try to correct, and Shulman to ignore. Sigh.

    BTW, from the final 906 to reconciliation was about 5 months. I too had concern about proper application of payments made. In the end, the refund checks I got made absolutely no sense, and you could not tie them to any of the documents that accompanied them. Neither did it tie out to the reconciliation spread sheet the Examiner prepared. It also did not match my reconciliation spread sheet.

    In the end I just cashed them and quit worrying about accuracy. The amounts were in the ball park. Maybe a little higher than my detailed reconciliation spread sheet indicated. I went through the effort of calculating the daily interest (by IRS formula) and determining when the penalty clock should have stopped running based upon my payments and years applied.

    Since I obviously was not going to get it to match up perfectly, and since it was “close enough for government work”, at some point you just have to give up with these guys. So it goes.

    So Michael, you might have to argue about the total interest amounts after the 906 is finalized. I would NOT be paying the interest up front. At least I did not. I just sent them the check for the “in lieu of” penalty that was negotiated by the TAS, and then let them do the final reconciliation via standard back office audit processing. In that case, you might get proper application of interest, or something closer to what you expect it should be. At least, from my examiner, that is how I understood it was supposed to work. That is how they apparently did it, except it the amounts that they calculated was totally incomprehensible to me based upon the paper work which accompanied the refund checks for my over payments. It was close enough, and maybe actually in my favor according to my reconciliation records.

  14. By the way, the 906 that I received did not provide for any interest on the 25% miscellaneous penalty. And I do not anticipate that any interest will be imposed in other cases either. I believe the IRS chooses to characterize the penalty as a Title 26 penalty so that, any portion that is somehow not collected upon execution of the closing agreement can be collected through the normal mechanisms that apply under Title 26. I don’t believe it’s so that they can collect interest. Of course, having said all that, if the IRS started charging interest on these miscellaneous penalties in the future, it wouldn’t surprise me. The IRS has been so unreasonable in so many respects, it would take quite a lot to surprise me.

  15. Mr. Miller and Mr. Mopsick

    My interpretation is that the FBAR title 31penalty should be treated like a ‘normal’ administrative penalty by an agency such as OSHA or the SEC. I don’t think bringing the suit is the ONLY way to collect, although it might be the preferred way in case there is a fair amount of money involved, AND the person in question actually has the assets. In the Williams case, I gather from the appellate briefs that a lot of Williams money was frozen for some legal reason and the suit may have been necessary to unfreeze it.

    There have been very few FBAR fines assessed and even fewer collections (the last TAS report mentioned only a miniscule number turned over for collection).

    I think at a minimum, the iRS can collect via offsets such as refunds, so that anyone facing a potential FBAR penalty should avoid a situation where he is expecting a refund.

    Mr Mopsick

    I believe from the IRM that you can take the case to Appeals first, then either pay and sue for a refund (although I think it might be in the court of Federal claims), or wait for the government to sue (in which case interest would start to accumulate).

    For the larger willful penalty, the standard of proof is so high that it would be hard for me to believe that the IRS will not settle.

  16. Steven

    The case you cite: “signatory on foreign account” under audit. Is this a standard audit or as part off one of the VD programs ? if standard, does the examiner seem to have more discretion than under the VD programs ?

  17. @Steven

    Thanks for your comment on this difficult problem.


    My sense of this is that one of the intentions of OVDI is to convert the title 31 FBAR penalty to a title 26 penalty (as noted by Steven in his comment). This should make Canadians very wary of entering OVDI. As it stands now it seems fairly clear that the Canada will NOT collect FBAR penalties. But, the “in lieu of” penalty …

    The IRS might argue that this is a different issue.

  18. @renounceuscitizenship

    I would just say, that practices to date have not indicated that they are doing that. Once form 8938 kicks in, they will certainly apply penalties on that one under Title 26, but so far, by everything I have read and seen, Title 31 still applies on these FBAR penalties. If anyone sees an actual change in practice by the IRS, and I don’t put it past them, that will “light up” the Tax blogs, I would think!

  19. I keep wishing that this Society will become more and more worldwide and have people from many countries, I am hoping that we are moving in this direction. There are millions of Americans Abroad.

  20. @Thatisme, so do I. This is a Canada-centric society but there are also many US Persons affected in the UK, for instance. What amazes me is how there is hardly any media coverage over here about FATCA. It’s almost as if the press have been told to keep quiet so as not to cause panic…

    I suspect that most expats here are completely unaware and not filing or being looked after by their firms with fancy accountants. I hadn’t realized how unusual I was in ‘going native’ with my investing. But until last year when I first heard of all this, I only had regular contact with one other American expat and she had never heard of it either…as she has no assets, she’s burying her head in the sand. In hindsight I should have joined an expat organisation.

  21. A few comments re: points raised in various posts:

    1. Re: collection. Yes, there are occasionally-relevant other means of collection of FBAR penalties, such as seizing a taxpayer’s otherwise-available refund. For the most part (and I apologize for the prior over-simplification), however, the Government must bring a lawsuit in district court

    2. While the closing agreements (Form 906) describe the miscellaneous penalty as imposed under Title 26, and treat the penalty as arising with respect to the 2009 year, I’ve now seen a few and none of them impose interest on the miscellaneous penalty. I think Steve Mopsick may have suggested there might be interest imposed, but so far I’ve not seen it and don’t expect to.

    3. Re: collection in Canada, I’m not sure what would possess a person to sign a closing agreement with the IRS if s/he did not intend to pay, so I’m not sure when it would be relevant. Having said that, if you signed a closing agreement providing for a 20% or 25% (or other) miscellaneous penalty, ostensibly under Title 26, then in my view it would be reasonable for the US to ask (and for Canada to agree) to treat it as a tax penalty.

    4. Re: accrual of interest, I did have an agent recently tell me that she could and would reduce the interest payable to give us “credit” for the funds held by the IRS since August of last year. Apparently, she’s nicer and/or more competent than the agent (referenced in one of my prior posts) who told me he just couldn’t do that, and that the taxpayer had to pay interest accrued through some date in May (with no “credit” for the payment made last August) and then wait to get the excess back later.

  22. Pingback: Attention: OVDI penalty may be collectable in Canada (says Michael J. Miller) | The Isaac Brock Society

  23. Yes Mona. I also find it strange that more Americans abroad are not aware, concerned, protesting, joining ACA or being in this Society. And the media in the world is mainly silent. I known! a lot of resident aliens in the US and either they do not know about FBARS and FATCA or are not concerned or complying. Is the problem with us? I am member of Democrats Abroad, tried to talk about this issues with very few responses. I guess that Americans Abroad, employed, who have savings in the USA only have to file form 2555 in addition to 1040…Are they the silent majority? Perhaps I should move alll my savings to the USA? Is this the problem?l

  24. Completing my thinking… You all please correct me, The harrassment for Americans Working Abroad starts if they have more that $US 10.000 on all accounts, if they have more than $US 50,000 in one account, if they are Self-Employed or if they receive non taxable income in the country of residency. They may not have to pay any IRS income but they will have to spend endless time and money complying with the forms and forms. And yes, they will have be enormous penalties, more than the ones Americans Living in the US have. This to me is discrimination plain and simple.

  25. @markpinetree
    ‘The harrassment for Americans WORKING Abroad’ – it also applies to retired Americans living abroad – they don’t have the FEIE to use.

  26. @tiger, the discrimination goes on; layered on those abroad – seniors/retired people (re FEIE), persons with disabilities trying to hold RDSPs (treated as trusts) and having the right to renounce, US citizen children in Canada (RESPs are treated as trusts), those wanting to participate as community volunteers or in professional organizations (re treasurer or co-signatory roles), etc. Some days it seems that every avenue is blocked.

  27. If someone were to prepay the in lieu of penalty and then decided to opt out on getting the closing statement, could the IRS just assess the amount, and then retain the in lieu of penalty as an ‘offset’ ? I tend to doubt it, since the in lieu of penalty is for the specific purpose of the program, it is not a tax penalty or a tax payment and hence can not be used as an offset.

  28. As for Canada collecting tax and/or penalties claimed by the IRS, see the following, from Article XXVI A (“Assistance in Collection”) of the consolidated version of the Tax Treaty:

    “7. A revenue claim of an applicant State accepted for collection shall not have in the requested State any priority accorded to the revenue claims of the requested State.

    8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that

    (a) where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested State, …”

    There is one caveat: The Tucker cases in Britain and the Channel Islands, and Bullen v. Her Majesty’s Government of the United Kingdom, 553 So.2d 1344 (Fla. App. 4th Dist. 1989), show how a tax claim made part of a bankruptcy proceeding could be enforced abroad even where the tax claim alone could not be, under the Lord Mansfield dictum.

    In any event if one has not the intention to pay there is no reason to concede an obligation to do so. The whole point of the Lord Mansfield doctrine is that administrative claims should not be adjudicated abroad; an admitted debt would seem to bypass or compromise this principle, just the way its inclusion in a bankruptcy proceeding has done.

  29. @tryagain…

    Well first of all, I am not sure why anyone would prepay a “in lieu of penalty”. That seems fool hardy. You would naturally wait until the assessment, as you might want to ‘opt out” by then instead of paying it.

    Would it be refundable, well I assume yes it would be. They really have no way legally to hold on to it, if you don’t sign the 906 closing agreement. So, I think you answered your own question, but I am not the expert in this matter.

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