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Taxpayers facing an IRS audit or investigation often feel like the decisions come out of nowhere. Lack of transparency isn't a new problem for the Internal Revenue Service (IRS). In fact, a recent report from the National Taxpayer Advocate explains why that feeling aren't so far from the truth.
The National Taxpayer Advocate Service is an independent organization within the IRS. It represents taxpayers on a national level to make sure they are treated fairly by investigators and auditors within the agency. Every year, the Taxpayer Advocate files Annual and Objectives Reports to Congress, reviewing IRS procedures and outcomes.
Prior years’ reports made recommendations for how the IRS could better interface with taxpayers and build loyalty. But the recent 2018 Objectives Report to Congress takes a different perspective.
Since 2009, the IRS has encouraged taxpayers to take advantage of its Offshore Voluntary Disclosure Programs (OVDP). This program allows taxpayers to voluntarily report non-compliance with international income reporting and FBAR filing requirements to reduce the penalties they may face. By 2016, the OVDP collected $10 billion in back taxes, interest, and penalties from over 100,000 taxpayers.
But the decisions behind those collections efforts raise concerns for the Taxpayer Advocate. The IRS regularly assesses a “miscellaneous offshore penalty” (MOP) as part of its streamlined program for non-willful violations of international reporting requirements. The application of these MOPs are governed by Frequently Asked Questions (FAQs) and interpreted by IRS examiners and Small Business/Self-Employed (SB/SE) Counsel. The IRS does not make those FAQ interpretations publicly available. According to the Advocate, this violates Taxpayer Bill of Rights adopted by Congress in 2016.
The Taxpayer Advocate warned that this lack of transparency raised secrecy concerns reminiscent of the 1920s. It quoted a 1926 report that said:
“[R]ulings were known only to insiders … This system h[d] created as a favored class of taxpayers, those who ha[d] employed ‘tax experts.’ It ha[d] created a special class of tax practitioners, whose sole stock in trade [was] a knowledge of the secret methods and practices of the Income Tax Unit.”
The Report acknowledges improvements, but says “a lack of transparency in connection with undisclosed FAQ interpretations could present the same risks.”
To address that secrecy, the Taxpayer Advocate provided some information it uncovered that may be useful to taxpayers:
The Report said that disclosing the details related to that information could reduce unnecessary Hotline calls, increase taxpayer confidence in the system, and reduce requests for assistance within the agency.
In addition to general secrecy concerns, the Taxpayer Advocate specifically called for more transparency in the OVDP decision-making process. The Report says:
“When an OVDP examiner makes an OVDP-related decision based on guidance from a field attorney, technical advisor, or committee, he or she is not required to explain the resulting ‘take it or leave it’ decision to the participant or allow the participant to speak with the decision maker.”
This means that taxpayers can’t be sure their information was communicated properly or whether some improper interpretation or bias colored the examiner’s decision. There is no way to know if the decision in any particular case is consistent with other similar cases.
The IRS historically has released certain information about settlements paid in the OVDP and other tax collection efforts. But the Agency has recently refused to update those statistics, claiming it “may impair tax administration.” It has also begun to refuse to share statistics related to FBAR penalties with the Taxpayer Advocate or the public. The IRS now claims the Treasury owns the FBAR report and the ability to control it, not the Taxpayer Advocate.
The Report says that this position is inconsistent with the Freedom of Information Act (FOIA). Instead, the Taxpayer Advocate pushes the IRS to release certain statistics, like average or median tax, interest, and penalties through and outside the OVDP. It says this could assure taxpayers they are being treated fairly, and that the OVDP is being administered on a rational basis.
All of this violates the Taxpayers Bill of Rights, the Advocate says. That includes:
These violations have caused taxpayers to feel singled out for arbitrary and capricious treatment, and in turn delayed the resolution of many tax determinations.
U.S. taxpayers with foreign asset reporting requirements can easily feel overwhelmed by the process and the potential consequences of an IRS evaluation. The Agency's lack of transparency certainly contributes to this. Having an experienced tax attorney involved in your matter can help provide clarity and certainty to a seemingly nebulous process.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years’ experience. If you have questions regarding the FATCA or FBAR reporting requirements contact Joe Viola to schedule a consultation.