Taxpayer Advocate Service — 2012 Annual Report to Congress — Volume One
141
MSP #8
The IRS’s Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by
Those Who Inadvertently Failed to Report Foreign Accounts
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case AdvocacyAppendices
Most Serious Problem
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case AdvocacyAppendices
Because the IRS has provided little guidance about what makes a return “high risk,” partici-
pants may still be subject to a full examination and potentially severe penalties, making the
new program less attractive. Moreover, the IRS has not provided any similar self-service
options for benign actors who are U.S. residents or owe more than $1,500.
37
The IRS
should increase the threshold and allow U.S. residents to participate.
38
Nonetheless, this
program is likely to reduce the burden on many nonresidents as well as on the IRS.
New duplicative reporting requirements make compliance more burdensome, and
“stack” penalties.
Beginning in 2012, those with certain foreign financial assets in excess of $50,000 must re-
port foreign account information (and certain other foreign financial asset information) on
IRS Form 8938, Statement of Specified Foreign Financial Assets.
39
Form 8938 is sometimes
called the “Tax FBAR” or “Super FBAR” because, as the Government Accountability Office
(GAO) has observed, it duplicates much of the information required on the FBAR, though
it is due with the return rather than on June 30, the due date for the FBAR.
40
In addition,
a taxpayer who fails to report a single account on both forms could face two sets of penal-
ties — the FBAR penalty under Title 31 and the Super FBAR penalty under Title 26.
Many benign actors still have not filed FBARs.
The IRS should be reducing (rather than increasing) the burden of correcting prior non-
compliance and the burden of reporting foreign accounts in the future, given the existing
compliance problem. While an estimated five to seven million U.S. citizens reside abroad
and many U.S. residents also have FBAR filing requirements,
41
the IRS received only
741,249 FBAR filings in 2011.
42
In the face of what may be a serious FBAR compliance
37
For a description of some benign actors who are U.S. residents, see for example, Steve Mopsick, Tax Justice II: No FBAR Penalties For Otherwise Compliant
Recent Immigrants to the United States (Aug. 2, 2012), http://mopsicktaxlaw.blogspot.com/2012/08/tax-justie-ii-no-fbar-penalties-for.html.
38
The National Taxpayer Advocate previously recommended increasing the $1,500 threshold to the “substantial understatement” threshold. National Taxpayer
Advocate 2013 Objectives Report to Congress 24. Individuals who owe less than the greater of 10 percent of the tax required to be shown on the return
or $ 5,000 may not have a “substantial understatement,” and thus, may not be subject to an accuracy-related penalty, particularly if a negligence penalty
does not apply. IRC § 6662(d). When the substantial understatement penalty applies due to an undisclosed foreign financial asset, the penalty rate in-
creases from 20 to 40 percent. See IRC § 6662(j). Thus, there is precedent for using the combination of a substantial understatement and nondisclosure
to distinguish minor omissions from those that may warrant more significant sanctions. Of course, we would still need to consider how to handle those who
had not filed returns, as they would not have a substantial understatement.
39
IRC §§ 6038D and 1298(f); Notice 2011-55, 2011-29 I.R.B. 53 (July 18, 2011). An FBAR is due on June 30 if the aggregate value of the foreign ac-
counts exceeded $10,000 during the prior calendar year. 31 C.F.R. § 1010.306(c).
40
GAO, GAO-12-403, Reporting Foreign Accounts to the IRS, Extent of Duplication Not Currently Known, but Requirements Can Be Clarified 2, 18 (Feb.
2012). Although the IRS met with GAO and provided technical information, neither the Financial Crimes Enforcement Network (FinCen) nor the IRS
responded to GAO’s recommendation to revise the Form 8938 and FBAR to address duplicative reporting. Id. at 3.
41
IRS website, Reaching Out to Americans Abroad (Apr. 2009), http://www.irs.gov/Businesses/Reaching-Out-to-Americans-Abroad; W&I Research Study Re-
port, Understanding the International Taxpayer Experience: Service Awareness, Use, Preferences, and Filing Behaviors (Feb. 2010) (citing U.S. Department
of State data). This number does not include U.S. troops stationed abroad. Moreover, the tax gap associated with offshore accounts could be significant.
See, e.g., James Henry, Tax Justice Network, The Price of Offshore Revisited 5 (July 2012), http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_
Revisited_120722.pdf (“at least $21 to $32 trillion” may be “invested virtually tax-free through . . . more than 80 ‘offshore’ secrecy jurisdictions”).
42
IRS response to TAS information request (July 27, 2012).