TaxProf Blog informs us that National Taxpayer Advocate Nina Olson’s 2017 Annual Report to Congress has just been released. The latest report contains similar criticisms of diaspora abuse and suggestions for improvement which the IRS & Congress ignored last year and every previous year since
2012 2011. Criticisms of FATCA and mailing delays have been condensed and toned down since last year. Criticisms of passport revocation have been expanded. That stuff is more or less business as usual; see below the fold for details.
However, there’s one new section which makes this worth a separate post: discussion of penalties for not filing international information returns (Vol. 1, p. 314). Ms. Olson managed to get her hands on some interesting data and examples: in particular, she found out that the IRS collected nearly twenty-three times as much in penalties on failure to file Form 3520 in 2016 as in 2013. (I wonder how much of this came from those 48,000 “Streamlined” participants.)
|Penalty type||Net penalty after abatement||Growth in
|5471 (Cat. 4)
8865 (Cat. 1)
|5471 (Cats. 1/2/5)
8865 (Cats. 2/3/4)
(comparable categories only)3
Adapted from Figure 2.7.1, “International Penalties Assessed and Abated in the Aggregate in FYs 2013 and 2016”. Penalties from Form 5472 are excluded. Notes:
1. Form name and penalty growth not in original; any errors in those columns are my own.
The actual recommendations in the new section are uninspiring. Ms. Olson doesn’t comment on the growth in penalties, nor inquire as to the reasons behind it. Nor does she suggest reversing the massive hikes in statutory level of those “offshore” penalties over the past two decades, which have left members of the diaspora in fear of bankruptcy for foot-faults on paperwork about local assets (while Homelanders with similarly-situated local assets face penalties proportionate to actual tax, or even no penalties at all because no equivalent paperwork exists for them). She only asks Congress to give the IRS consistent authority to waive penalties for reasonable failures to file — right now, they can waive “continuation” penalties for some forms but not others. All well and good, except they’re barely using the penalty abatement authority they have anyway.
New section on international penalties
Ms. Olson managed to find a problem which I have to admit I’d never noticed in more than a decade of occasionally browsing the relevant statutes.
26 USC § 6677 (demanding five-figure penalties for failure to file Form 3520 about “foreign” trusts), and § 6038D (demanding five-figure penalties for failure to file FATCA Form 8938) allow the IRS to waive both initial penalties and “continuation” penalties (additional penalties for each further period of 30 days). In an amazing example of legislative grace, § 6677 even limits the total penalty to 100% of the U.S. Person’s interest in the “foreign” trust. In contrast, 26 USC § 6038 and § 6679 (demanding five-figure penalties for failure to file Form 5471 about “foreign” corporations or Form 8865 about “foreign” partnerships) and their regulations only provide authority for the IRS to waive the initial penalties, not the continuation penalties.
Olson recommends that the language on “reasonable cause” and the authority to waive continuation penalties be made consistent among those four sections (and § 6038A, which requires foreigners who own US corporations to file Form 5472). She does not call for the reversal of the 3500% hike in offshore penalties over the past 20 years, documented by Andrew Mitchel over at International Tax Blog, nor even that the other four sections adopt § 6677’s limitation on confiscating merely all of your savings rather than several multiples of it.
Closer examination of the data belies the value of this recommendation: the IRS chose to abate lower amounts of penalties in 2016 vs. 2013, so giving them voluntary authority to abate additional penalties is not going to solve the problem (a facet of a broader issue we’ve discussed many times before: this is not just Congress’ fault). This is illustrated quite clearly by the zero percent abatement rate for continuation penalties on Form 3520 in 2016 — the IRS already have statutory authority to abate those penalties for a reasonable cause, § 6677(d), and aren’t using it anyway.
|Form1||Penalty type||Penalty abatement|
|5471 (C. 4)
8865 (C. 1)
|5471 (C. 1/2/5)
8865 (C. 2/3/4)
Adapted from Figure 2.7.1, “International Penalties Assessed and Abated in the Aggregate in FYs 2013 and 2016”. Penalties from Form 5472 are excluded. Negative amounts are in (round brackets). Notes:
1. Form name and change in penalty abatement not in original; any errors in those columns are my own.
This rise in penalty collection shown in Figures 1 & 2 goes hand-in-hand with a huge jump in small foreign savings plans with minimal income being classified as “foreign trusts” in the first place — probably because their owners sought advice from US tax consultants unwilling to take the risk of not filing all these silly forms. (Here I am referring to growth in the number of Form 3520-A filers rather than 3520 filers, because three years later the IRS still has not released statistics for year 2014 filers of Form 3520.)
You’ll also be happy to learn that the US government spent all of that $73 million in decreased penalty abatement on “foreign trust” owners with delinquent paperwork, plus $30 million more, on increased penalty abatement for delinquent Form 5472 filers — taking money from U.S. persons in other countries, and giving it to foreigners investing in the United States. All part of making the U.S. the world’s greatest tax haven!
About the only praiseworthy thing in the recommendations is the comment that “penalizing taxpayers who acted reasonably in trying to comply, especially taxpayers abroad who may have to file in multiple jurisdictions, will alienate them further”.
Comparison with previous years’ recommendations
Ms. Olson’s comments on passport revocation have been broken out separately this year and expanded, whereas last year they were discussed only briefly in the context of FATCA. The report now frames the problems with passport revocation in terms of the US Constitution’s right to travel, and no longer mentions their disproportionate effect on US citizens who live in other countries — though perhaps this is a good strategy to get Congress to pay attention and fix the problem, seeing as they’ve demonstrated quite definitively with “tax reform” that they don’t care about the diaspora anyway. (This year’s Vol. 1, p. 73; last year’s Vol. 1, p. 226.)
FATCA no longer ranks as one of the report’s “most serious problems” affecting taxpayers, and the comments on it are condensed greatly as compared to last year. Two issues discussed under the rubric of FATCA in last year’s report have been broken out separately in this year’s report and are themselves classified as “most serious problems” — passport revocation (mentioned above), and non-resident alien refunds (Vol. 1, p. 172). Discussion of FATCA itself in this year’s report is limited to a one-and-a-half-page recommendation to implement a “Same-Country Exception” to FATCA for both individuals and banks, and to eliminate individuals’ duplicative FBAR and FATCA reporting on assets. Last year’s report contained seven pages on FATCA, including discussion of citizenship renunciations, survey results in which US citizens abroad expressed anger at the government’s lack of response, and strong language about the “heavy-handed approach” and “enforcement-oriented regime” towards international taxpayers. (This year’s Purple Book, p. 29; last year’s Vol. 1, p. 220)
The section on allowing taxpayers abroad additional time to respond to math error notices has been similarly condensed, from five pages last year to two pages this year. Portions removed include statistics about renunciations of citizenship, along with the example about the taxpayer in China who received a notice nearly two months late, was left with nine days to respond, and couldn’t get the IRS on the phone. (This year’s Purple Book, p. 47; last year’s Vol. 1, p. 393).
The IRS keeps finding new ways to use CBT to extract penalty revenue from the diaspora, and Congress aren’t listening, but at least this report gives us new statistics! And better yet, if you were looking for a chuckle, the NTA webpage (though not the report itself) accidentally refers to FATCA as “GATCA”. Just Me’s acronym has made it all the way to the IRS itself — change you can believe in, making America great again, et cetera!