The Inept Taxpayer vs. The IRS

According to Forbes, the IRS is targeting “inept” taxpayers with audits and fines. The agency has recently become more aggressive in pursuing those who fail to report overseas accounts, income, and charitable deductions on their tax returns.

Is there any limit to how unpleasant the IRS can be with people who pay all their taxes but don’t fill out the forms correctly?

What is the purpose of an IRS amnesty program? Is such a program really necessary? Can’t I just file for the last year and be done with it? These are questions that are asked daily to the employees of Americans Overseas. 

The IRS is different from other tax authorities in that it is not satisfied if you simply come forward. Even innocent mistakes can be penalized. Fortunately, there are solutions and very good amnesty programs.

Therefore, it is so important to file a return with a tax advisor who has knowledge and experience in filing taxes for people living abroad or having a bank account there.

IRS problems because of submitting your tax documents late

Monica Toth, an 82-year-old American, was billed $2.2 million by the IRS for submitting tax documents late, an amount she argued was excessive and a violation of the Eighth Amendment.

The 82-year-old inhabitant of the Boston region manually completed her own tax returns using forms that were copied from a public library. Transactions in the Swiss bank account her father provided her in 1999 were left out. She also neglected to submit reports mentioning the overseas account until 2010.

She followed up with forms for the preceding five years and sent in the FBAR form that year with regret. Due to her admission, the IRS conducted an audit and found that she had underpaid taxes in some years and overpaid them in others. She paid the back taxes off for under $40,000 in total.

Is that it for now? Not exactly. The IRS determined that submitting the documents late was a serious crime in and of itself, independent of any errors on the tax returns. For this late submission, it sent her a bill for $2.2 million. 

Toth, who was representing herself in the case, argued that this punishment would violate the Eighth Amendment’s ban on “cruel and unusual punishments” and “excessive fines.” In lower courts, she was defeated twice. The Institute for Justice, an organization that campaigns against governmental overreach, is now petitioning the Supreme Court to review the matter.

IRS problems because FBAR regulations were unknown to the accountant filing your taxes

Engineer Richard Collins is a resident of Pennsylvania and was born in Canada. He had accounts in France, Canada, and Switzerland and spent a large portion of his work abroad. These accounts were required in specific circumstances in order to obtain payment for government contracts. Collins paid all the tax he owed on his earned income and had a CPA prepare his taxes. The FBAR regulations were unknown to the accountant. Years went by with this.

Collins eventually discovered in 2010 that he should have been filing FBARs. He sent those forms in along with corrected tax returns and went back to the accountant to correct the error. Since an early loss on the Swiss account more than offset any investment gains, the updated returns did not require further tax.

The IRS had a secret weapon up its sleeve: the FBAR regulation, which imposes a harsh “passive foreign investment company” tax on American taxpayers who own foreign mutual funds. By submitting the appropriate paperwork, a taxpayer can avoid this burden, but Collins was unable to do so because it was already too late. He received a PFIC duty bill from the IRS for $81,000 and paid it. 

The PFIC “gotcha” implied that, as in Toth’s case, the FBAR problems were related to an underpayment of tax. Collins had provided the disclosures voluntarily and without being asked to do so by an audit, but the IRS still imposed fines for his tardy FBARs. 

As a result, Collins was charged a $308,000 FBAR penalty, plus a $98,000 fine for failing to pay the penalty. He lost in the lower courts to the IRS and is now requesting intervention from the Supreme Court. If the case is rejected, Collins will lose a significant portion of his retirement funds.

FBAR penalties because of tax problems with the IRS

If you make a mistake, the federal government will use you to generate revenue. The IRS imposed FBAR fines totaling $1.5 billion over the nine years up until 2020. Drug traffickers, terrorists, and tax evaders were the targets of FBAR; however, the IRS is currently extorting money from largely innocent taxpayers using the disclosure rules. 

The fact that most of these conflicts don’t give the taxpayer the chance to appeal to the Tax Court—a venue that welcomes do-it-yourself litigants—is part of the issue for the little guy. Under current law, it is customary for the taxpayer to make the initial payment before engaging in a costly lawsuit in a district court or the court of claims. The typical person lacks the financial means to take the IRS to court.

IRS problems because you paid all your taxes but omitted some forms

The IRS’s capacity to spot many violations, where an average person would only notice one, is another tool in its arsenal. Alexandru Bittner, an American-Rumanian businessman with numerous bank accounts and intricate relationships, filed his taxes right, but failed to report his foreign accounts for five years, for which the IRS assessed him. 

Each year, he was supposed to submit one FBAR that included all of his accounts, with a statutory fine of $10,000 per infraction – totaling $50,000. However, the IRS responded that each account should receive $10,000 a year, for a total of $2.7 million. 

The Fifth Circuit ruled in favor of the tax collectors. In a hearing before the Supreme Court, Bittner’s attorney argued that this was absurd, as the balances on three of the accounts were insignificant (less than $50). If the government had chosen this path, it would have meant a criminal case seeking a 1,360-year prison term for a taxpayer who had filed all of his taxes but left out a few forms.

Tax problems with the IRS and professional help

Where’s the limit? Is there anything preventing the IRS from mandating that taxpayers submit reports every three months, or even every minute, and fining them accordingly? 

We advise taxpayers to be extra cautious with their tax filings and contact us for professional help if they are unsure of how to proceed. The IRS can be lenient in some cases, such as when a taxpayer has made an honest mistake and is willing to cooperate.

Need more information about the consequences of FBAR, filing tax late, and other IRS problems?

We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother. When we heard about this for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fined or pick up other problems?), and panic (what should I do?).

It is (unfortunately) true that there is an additional American tax levy. But there’s no information from the local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.

That’s why we started this initiative to help people from all over the world by providing proper information to avoid unnecessary panic and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with your tax obligations.

If you have more questions about the US exit tax and the US tax obligation, you can contact us at Americans Overseas.

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Source: Forbes IRS problems