By Anthony Parent of IRS Medic (used with permission)
(Editor’s note: I am troubled by the IRS approach of “bill first, ask questions later”. I myself received an unfair tax bill, including late fines and interest, but the IRS finally reversed it. Others are receiving what are extortionate fines and bills. Petros)
OVDP Process glitch
November 1, 2012
What happens when you owe the IRS money: the path towards “enforced collections”
If you owe money to the IRS, normally, the first collection notice the IRS sends is known as a CP503. This letter is sent from something known as ACS (Automated Collection System). This letter tells you have a balance due with the IRS and you better pay within 30 days or make arrangements to pay it off in full. If you fall to respond, the IRS ACS will then send you a CP504. This letter will say “Notice of Levy.” It tells you you better respond in 30 days or else. If you do not respond ACS (or a revenue officer, if your case has been so assigned) will send you something known as a Final Notice of Intent to Levy. If you do not respond with a request for a Collection Due Process hearing, the IRS is no free to levy and garnish your wages, bank accounts, accounts receivables and even retirement accounts.
The IRS Offshore Voluntary Disclosure Program (OVDP) Process
Thousands of US taxpayers have failed to report their worldwide taxable income from bank accounts overseas. Many of them were not aware that the IRS has universal tax jurisdiction, and some people were intentionally hiding income in order to evade taxes. Whatever the reason, the IRS has wanted to give taxpayers a chance to ‘come clean,’ and report those accounts using the offshore voluntary disclosure program (there is a standard 2012 OVDP and a more recent “streamlined OVDP”). As part of the OVDP (by the way “OVDI” is used interchangeably with OVDP; the “I” stands for Initiative — however, the IRS has indicated it wants to start using “OVDP” exclusively)
The OVDP process requires taxpayers to file all amended returns, and as long as they are able, to pay all additional taxes and penalties along with interest, along with auguring for lower penalties if necessary ad possible appeals and litigation. Most OVDP attorneys use a software to figure out this balance due to the penny and then typically add in a few extra weeks of interest so that tax bill is paid in full. If anything, the taxpayer will get refund once the case is closed out.
So we send the amended returns, payments and the entire OVDP package to the OVDP unit. There, they code in the amended return and process payment. We await our successful close out of the case while the IRS is auditing our claims and support for a lower penalty amount if applicable.
So why are clients who paid their bills in full getting collection notices?
I can’t say for sure, but through many many calls, this is what it looks like is happening. The OVDP unit is properly adjusting the taxable income on the taxpayers account transcript. Yet, the OVDP process includes no such mechanism for altering ACS that this is no normal case. However, the proper tax, penalties and interest and payment are not being reflected. So that a balance due is being shown. And because Automated Collections Systems is, well, automated, a balance due always means a CP503 — that first collection letter.
So what is the proper response?
In these cases, it is difficult to find anyone in the OVDP unit to take care of the matter ask there is not any one particular agent assigned yet. So our response to this process has been to write to ACS to inform them that the taxpayer in is in the OVDP attaching a letter indicated the acceptance into the program. Because we have not seen any CP504 issued yet (again the CP503 is issued after a CP503), so we believe so far that out response has been adequate to stop these IRS collection letters. If it is not, the fail-safe we have is responding to the Final Notice of Intent to Levy by requesting a Collection Due Process hearing. At a collection due process hearing we can get face-to-face with a real IRS appeals officer and explain that enforced collections is totally inappropriate. Of course, having to use the Appeals Division of the IRS to stop the IRS from collecting taxes when no tax is due, is not exactly an efficient allocation of resources.
Sending collection letters when no tax is due is not all that unexpected when dealing with an agency as powerful and as large as the IRS. My internal outrage meter has barely budged. The response to these letters is not to ignore them however, but rather, be the liaison of one IRS agency to the other. The IRS has difficulty speaking with each other, it can not control all consequences of the processes it imposes. Therefore, is the job of the tax professional to understand the IRS’ limitations and make appropriate accommodations. If we want to ensure the best result, the smoothest possible process, we can’t be shy about doing jobs for the IRS, that the IRS should probably be doing themselves.
UPDATE: I talked to quite a few other OVDI attorneys from across the country. And they too have experienced the same phenomenon. We all have been handling this glitch in the same way: Contacting ACS and keeping track of all notices to make sure no enforced collections take place. One attorney used the services of the Taxpayer Advocate to help facilitate keeping ACS from taking collection action. However, he told me that was years ago on a 2009 OVDI. Right now, such a tact would likely not work as the Taxpayer Advocate has severely limited the types of cases in which it will intercede (this is because their workload has vastly increased). Now, we typically need to show an immediate irreparable harm in order to request Taxpayer Advocate Assistance.
*Interesting blog, especially for those who are still US citizens:
@SwissPinoy, Anthony mentioned in that recent blog new audit centres that the IRS would establish in major urban centres offshore (not afraid of a little harassment from the local barbarian populations, evidently).
Anthony Parent is apparently unaware of the new centre proposed by the recent tax summit between Canada and the United States: http://isaacbrocksociety.ca/2012/03/09/shulman-and-flaherty-summit-ends-irs-and-cra-to-merge/
What I do not like about this article is how it pushes you toward using attorneys. The attorneys are not doing anything magical. They are taking fees for a process that can be done by the taxpayer.
The OVDP program is aware of this glitch and by calling the OVDI/P hotline as soon as one gets a notice, one can get at least a 9 week hold put on the collections. It took just one call on my part to get the collections held. However, you have to remember to do this every 9 weeks or so.
As an individual, one can also call the TAS and request help because all taxes have been paid and the letters that are received indicate immediate harm (penalties, liens, etc.). According to the TAS, it is possible to get a 14 week hold and they will help you to get one if you are accepted by them. They are sympathetic to OVD cases as there have been so many glitches that make the process difficult and unnecessarily costly for taxpayers who entered the program in good faith to correct minor paperwork foot faults. Remember, if you are resident abroad, the TAS considers problems for taxpayers abroad as one of their four main priorities.
Most practitioners see this as a small glitch in the system. It strikes me that they are jaded because they see so much. However, for a taxpayer trying to comply and for a problem that has been occurring frequently, this is quite upsetting as it causes an unnecessary waste of time and money. The monetary damage is even worse if a practitioner is used.
No matter how minor the glitch is, it will lead to extra costs for the taxpayer that could have been avoided had the IRS properly designed the system to begin with.
@Lisa, Thank you very much for your valuable perspective.
As a matter of caveat, whenever we reproduce an article or blog post by a tax lawyer, it is for informational purposes only and not an approval or recommendation of the lawyer in question. It has always been the editorial policy of Isaac Brock Society to allow tax lawyers or accountants to participate, knowing that they may receive the possible benefit of attracting clients. But we also benefit from free legal opinion in many cases. But caveat emptor.
So far, I’ve paid zero dollars to lawyers. It is in my opinion preferable to get out of this trap without paying legal fees. However, if the IRS charges you with extortionate civil penalties or criminal charges, obviously the person has no choice but to seek counsel. Others have benefited from the advice, expensive as it is, of a legal expert, while some others have had their lawyers take them to the cleaners by leading them into OVDP when another path would have been better in consideration of their minnow status. My feeling is that if you are a minnow owing little tax (certainly less than $25,000) even if you have foreign bank accounts, the best thing is to stay out of the OVDP. In all likelihood, the fine outside the OVDP, even if you get a fine instead of a mere warning letter, will be far less extortionate than the standard 27.5% OVDP fine. The IRS has said that they cannot throw the full book at anyone except the most egregious tax evaders and money launderers (think Tony Soprano).
Add to the misery, that you have seen those notices come out of the Paris IRS office. Normally, they arrive in your mailbox after the due date for payment printed on the paper.
@Mark Twain, I am surprised that there is a Paris office of the IRS. I though France was a sovereign country. Why are they allowing the Romans set up a tax collecting offices without first kicking their asses in a war? Oh, I forgot. The US even has military bases in Europe because they did just that in 1945.
Taxpayer Advocate Sees Threat from Increased IRS Automation and Workload
“The sharp increase in the IRS’s workload is due to several factors, including the increasing complexity of the Tax Code and the code’s frequent changes, the need to provide service to an increasingly diverse taxpayer population, the IRS’s increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity theft, and the implementation of new third-party information reporting requirements.
To keep up with its rising workload, the IRS is increasingly relying on automated data-matching procedures to identify potentially inaccurate claims and adjust tax liabilities. However, automated processes are inherently imperfect, so the taxpayer’s return position often turns out to be correct.”
National Tax Advocate, Nina Olson expressed her concern about this in her annual report to Congress last year.
“The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers—and at the same time reduces the IRS’s ability to deliver on its core mission of raising revenue.”
Petros — thanks so much. It is always a honor to be linked here. I always feel a bit like the dumbest guy though, always so many great comments and insights here down at the IBS.
@Lisa “What I do not like about this article is how it pushes you toward using
attorneys. The attorneys are not doing anything magical. They are
taking fees for a process that can be done by the taxpayer.”
For you to say this, you must be underestimating your capabilities. Yes for the most part, it is nothing magical. Document everything, anticipate what they are going to get wrong, document that, appeal to proper person, send copies of everything you sent twice before, raise relevant issues, minimize unhelpful facts, get the IRS to do what they said they were going to do, have a thick skin, keep calm, get the IRS to do what they said they were going to do months ago, send more copies, deal with change the IRS made.
Yes, @Petros, for the ‘minnows’ those cases do make me uncomfortable. I just get paranoid about not being able to deliver value. Sometimes the value is just doing the busywork and that seems fine with them.
@Sam Clemens — that sounds about right.
@bubblebustin — -and then the automated errors they make require more use of personnel which increases the need for automated systems which will create more work for personnel…oh yeah…ObamaCare is lookin’ good.
You made me think about HAL in 2001: A Space Odyssey 🙂
IMDB has some memorable HAL quotes, where he (it) says:
“I know I’ve made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I’ve still got the greatest enthusiasm and confidence in the mission. And I want to help you.”
@Anthony, isn’t there anything more the practitioners can do, in their interaction with the IRS so that these types of problems don’t happen anymore. The solutions you propose in your article are a patch to the issue. Have practitioners in general tried to work out a solution so that these problems don’t happen in the future, instead of fixing individual cases?
@Anthony, see this post: Eighth Amendment: The IRS is bluffing, bad faith in OVDI
This shows that the IRS procedure for FBAR fines shows that they would be reticent to assess severe fines because of fear of Eighth Amendment challenge. Therefore, they recommend only using maximum fines on the most egregious of offenders. That means if you earned the money yourself, you are not the most egregious offender–i.e., you didn’t launder or steal or extort the money but earned it from working. This applies to homelander, but all the more to people living abroad who don’t even have foreign accounts –but accounts in their own country of residence. I don’t think the IRS has anything to gain through normal procedures of FBAR– and hence, they scare the hell out of everyone hoping that they go into the OVDP. Then cross border specialists think that this is the way to go. Then the IRS throws the OVDP book at innocent minnows living overseas, as Phil Hodgen’s recent blog post has show, the IRS is still up to these shenanigans and they will continue it as long BHO, the Persecutor in Chief, of expats remains in office.
As a practioner, you should probably reserve OVDP for your clients who really had mens rea intent to break tax laws. That doesn’t include people who obey all the laws of their country of residence or immigrants to the United States who didn’t know about FBAR requirements. It only includes wealthy homelanders who stash money in secret accounts abroad–but even those whales have rights that the US government is destroying, how much more us little guys?
@petros. Yes, my tax notifications are sent from Paris. The same notice you got, nullifying your foreign exclusion—mine was $22,000-ish, wasn’t solved for 9 months with 3-5 threatening letters. From 1116 error was $1800 ish, wasn’t solve for 9 months with 3-5 threatening letters. The last one gave me no receipt that it was solved—luckily I had sent a payment of $1 and I indeed received a return check of $1.
The French army gives away their war material to the invader so as to save the war material
@anthony.e.parent – Thank you for making a detailed list of all the things I did. That’s what it takes. The documenting, copying and letter writing was the most time consuming. It is entirely possible to do without a lawyer.
I agree it is important to remain calm. Thanks to blogs like Isaac Brock and Jack Townsend’s this problem was discussed ages ago and I was prepared for it. I also did not view the IRS as an adversary. They were helpful. I made one phone call and the the IRS very promptly called me back. They were aware of the problem and had a procedure in place that made it easy for me to find a temporary solution that has been working. As I know I am not one of the first the error happened to, it was probably easier for me as procedures have been put in place to manage the situation. I called the Hotline and once I did, as I said, a solution that has been working was found. I am sure others will experience this problem and if they are reading here, this solution could possibly work for them until an agent is assigned.
I thought the NTA made a case in her 2011 report to congress that filing requirements are too onerous for USP’s to do without expensive professional help! @Lisa, you are making us all look bad 😉
Petros says –
Others have benefited from the advice, expensive as it is, of a legal
expert, while some others have had their lawyers take them to the
Same on the financial side with the accountants. Hell, same for a roofing company too! Those “professionals” sort out into the good, the bad, and the ugly. Far trickier than you yourself beginning to comprehend the outlines of the mammoth US tax code and its quantum interactions with your local circumstances is identifying a good professional. This is an art, not a science. Woe betide anyone who trucks with a bad (have done so, an uglier bad), and woe swamp anyone who falls prey to an ugly. Hallmarks of the good: charging only for what is necessary, letting you do as much of the garbage work as you can, not trading on fear, not cascading fees generated by blatant incompetence. You cannot go to school to train your nose to smell out the rats that seek to drag you into their sewer. Except the school of hard knocks.
@bubblebustin – I could never do the filing requirements myself. The same income that it takes 3 pages to declare in the country in which I reside takes 68 pages to declare in the US. Nina is right.
OVDI is another matter. I will reserve comment on the approach I am taking until my case is finished. Whenever possible, I will share experiences with the hope that they will possibly lessen the fear factor, LCUs expended and monetary costs for others.
Thank you and bless you Lisa for being willing to share with others here. There are many silent readers coping with the same thing I’m sure. I met a few at a gathering several months ago, and gave them the IBS web address and a few others, and also the information for the Taxpayer Advocate. Two who told me they were in the OVDI were just tiny minnows or krill who were just scared into it, or who thought that was their only route – because that’s what the IRS kept saying. One was a born dual trying to ‘do the right thing’ who came forward against her parents best advice. There are lots of others still deciding what to do. I can think of many who would be considered US taxable persons abroad – relatives, acquaintances, co-workers, friends, casual strangers – they’re everywhere. Some are now aware, most are still oblivious.
Cross my fingers for you, and for all of us here.
Why is the IRS sending collection notices to people who have paid
their taxes in full?
Because they are still U.S. citizens and titled property of the U.S.G.
OVDP is for criminals. If you are not a criminal don’t enter this program!
Would you be interested in weighing in on this discussion?
@stateless, perhaps you should get a powerful microscope to check your hiney for the following: http://isaacbrocksociety.ca/2012/06/30/the-property-of-the-usa-tattoo/