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ACA friend and Tax Advisory Council member Jane Bruno has written another strongly-worded letter to the President about IRS policy on enforcement of the FBAR and "voluntary disclosure." A copy of the letter is reproduced below.

June 5, 2012

President Barack Obama 
The White House
1600 Pennsylvania Ave. NW
Washington, DC 20500

Dear President Obama,

I am compelled once again to write on this troubling subject of the FBAR form that collects information from Americans with foreign bank accounts. Even though no one in government ever actually responds to my comments, I appreciate that I live in a country where I am free to express my thoughts.

In case you don’t recall my last letters, let me refresh your memory. The FBAR (Report of Foreign Bank and Financial Accounts) is the form connected with an information-gathering program created by Congress and administered by the Treasury Department and the Internal Revenue Service. Under it, Americans with more than $10,000 in foreign bank accounts are required to report these accounts yearly to the US government—as well as report any income generated by the accounts on a timely filed tax return. As you can imagine, it is vastly more complicated than that, but the fact of the matter is that problems arise for those Americans that for a variety of reasons (like they have never lived in the US or have been married to a foreign national for 25 years or don’t regularly read IRS publications) have not filed this form and now are in a quandary about what to do.

Before I go any further, I ask you to take your mind back to a time in your childhood when something happened that made you declare to anyone that would listen “That’s not fair!” Maybe it was a sibling that mistreated you in some way or a bully or a bad grade you didn’t think you deserved. It doesn’t matter—you felt unfairly treated. And, it turns out, a sense of “fairness” is a basic human motivation. Psychologists that have studied this go so far as to say that within not only American society, but ALL societies, we experience an urge to cooperate if treated fairly—and a desire to punish or avoid those that do not treat us fairly.

What does fairness have to do with the FBAR? You might argue this form is required under federal laws and if it was not filed, some enforcement/penalty action is required. After all,

“ignorance of the law is no excuse”. But wait, what if ignorance in this case IS an excuse? What if some Americans living overseas could not reasonably be expected to know about this filing requirement—especially since our government has made no particular effort to reach out to those people and it is almost impossible to reach an IRS office in the US and get any attention at all—never mind timely, correct advice?

And couple the understandable ignorance of these non-filing Americans with the harsh penalties imposed for that ignorance and you have the basis for a very unfair process emerging. In case you are not aware of what these penalties are, let me present them as succinctly as I can. On the one hand, the delinquent filer has the option of filing 8 years of past due FBARs along with reporting and paying tax on any foreign income not already reported. They are encouraged to enter a “voluntary” disclosure program that is so complicated they are advised to hire lawyers and accountants to help with the process. In most cases, if all goes well, they will only have to pay exorbitant professional fees, tax, penalties and interest on the unreported income, and a penalty of 27.5% on the highest balance in their accounts (I state these provisions knowing they are subject to change depending on the latest Treasury/IRS initiative). If they don’t agree with that, they can seek to move out of the “voluntary” program at which point they will be subjected to the equivalent of an audit from Hell. And by the way, if the money that was in an account 6 or 8 years ago is no longer there because, let’s say, it was used to pay for Junior’s college costs—too bad—the taxpayer is still expected to come up with it. So, for example, if the taxpayer had $100,000 in a foreign savings account for school expenses, and he earned $2,000 over the course of several years from it, he is now penalized well over $27,500 for not reporting income that would, at best, have put about $600 into the US Treasury.

If the taxpayer, caught like a deer in the headlights, decides to do nothing—no FBAR and no tax return—because of the cost, the hassle, and this “fairness” issue, he may well find himself facing criminal prosecution for “willful failure to file” PLUS all the above-mentioned taxes and other expenses, should the IRS find out. And this possibility is very real as foreign banks, trying to avoid hassles with the US government, “rat out” Americans holding accounts with them.
Taxpayers that have not filed an FBAR find themselves between the proverbial “rock and hard place”. I can’t help but think of the Salem Witch trials as I see what is happening to some of these people. In the witch trials, as I understand it, accused witches were tortured in various ways to include water techniques such as dunking. If they happened to survive, that was considered proof of their “witchness” and they were burned at the stake. If they did not survive, they were no longer considered witches, but they were, well— also dead.

And while this situation obviously is not at the extreme of the witch triaIs, I can assure you that many honest, hard-working Americans are being seriously impacted by this intolerant and unfair enforcement policy. I have had clients in my office, on the phone and through e-mails express in no uncertain terms how this program has disrupted their lives. One lady told me her foreign husband was about to divorce her because of the depression she was experiencing as a result of her fear of “getting caught” by the IRS. I have heard stories of sleepless nights, anxiety, weight loss, weight gain, etc., as Americans (who in some cases have never lived in the US because they were born overseas to American parents) get wind of this program one way or another and panic.

It is time for you, as the President, and leaders in the Treasury Department and the Internal Revenue Service to do something more than send me a thank you note for writing. It is time for all of you to step up to the plate and take responsibility for a program that is not working on any level. There are many others who have written far more skillfully than I on proposed solutions to create a “safe harbor” for Americans that are being caught unfairly in this web. Others have written about the cost/benefit ratio (very little in the way of additional tax collected and by the way, burdensome penalties should not be how our government finances its next unnecessary war). The IRS itself has acknowledged that it is understaffed and overwhelmed by the sheer amount of labor required to process these “voluntary” disclosures, and has been criticized by other government entities for the mixed and often misleading messages it is sending to taxpayers on how to disclose.

We all want to believe in a government that is by, for and of the people. Inherent in that statement is the notion that those governed will be treated fairly. This is a case where fairness has dropped out of the equation and been replaced by a rigid adherence to form, and a blind insistence on lumping all Americans with foreign bank accounts into a box titled “suspicious” or “highly suspect”. I call on you, our leaders in government, to recall how important fairness is in your life and to address the problem promptly and FAIRLY.

Thank you for your time and attention.


Jane Bruno

Cc: Douglas Shulman, Commissioner, Internal Revenue Service
Neal S. Wolin, Deputy Secretary, Department of the Treasury
Michael Mundaca, Deputy Assistant Secretary, International Tax Affairs
James Freis, Director, Financial Crimes Enforcement Network
Rep. Dave Camp, Chairman, House Ways and Means Committee
Senator Max Baucus, Chairman, Senate Finance Committee
Jackie Bugnion, American Citizens Abroad