US taxpayers volunteering information about their offshore holdings have faced savage and unfair treatment from the Internal Revenue Service (IRS), according to a consumer champion.
Nina Olson, the US national taxpayer advocate claims the IRS has badly treated taxpayers who inadvertently broke tax rules in her annual report.
She argues the IRS has over zealously pursued ‘benign actors’ by charging them double any unpaid tax and interest.
The study also revealed taxpayers who decided against voluntary disclosure by opting out were challenged with automatic audits that resulted in an average penalty of around 70% of any unpaid tax and interest.
“Those who opted out may have faced lower penalties than taxpayers who took part in the offshore voluntary disclosure, but they were still significant,” she said.
“Taxpayers declaring the lowest accounts of $87.145 were treated disproportionately with penalties of almost six times the amount of unpaid tax.
Genuine errors
“Taxpayers without representation paid even more – an average eight times the unpaid tax – while those with the largest accounts of $4.2 million or more paid a penalty of three times their unpaid tax.”
The taxpayer advocate makes an annual report to the US Congress that details taxpayer issues and recommendations for redressing the balance.
US expats in particular have voiced concerns about tax penalties, often through the lobbying group American Citizens Abroad.
The group has long complained about how the IRS treats expats who were often in the dark about how to declare their income and assets on tax returns.
Olson points out in her report that many US expats are unaware of IRS rules and are penalised for making genuine errors.
She explained that the IRS received 807,000 foreign bank account reports (FBAR) in 2012, despite more than 7.5 million US expats living overseas, while thousands more US citizens living in the States but holding offshore accounts should also have filed the report.
FATCA protests
Olson was appointed national taxpayer advocate in 2001. She alleges dozens of recommendations in her reports have gone before Congress since then, but just 15 have been enacted.
American Citizens Abroad has been at the forefront of protests against the new Foreign Account Tax Compliance Act (FATCA) which comes into force from July 2014.
FATCA requires foreign financial institutions to identify US customers and report their financial information to the IRS.
The report will then be cross-checked with tax returns to highlight discrepancies in declared income and assets.
Failure to declare their financial affairs will leave US taxpayers open to automatic penalties, including fines of starting at $10,000 to jail terms.
America and Eritrea are the only two nations in the world which threaten and harass their diaspora with human rights violations.