The Tax Advocate within the IRS has written a report critical of the IRS in its handling of OVDP and OVDI participants and US taxpayers abroad identifying it as a “Most Serious Problem”. For my own purposes I’ve distilled into a few critical paragraphs:

“Existing statutes, as implemented in the IRM (Internal Revenue Manual), do not authorize the IRS to assert the maximum FBAR penalty in every case.
Even before congress increased FBAR penalties in 2004, the IRS published tiered penalty mitigation guidelines in the Internal Revenue Manual (IRM), directing examiners to apply less than the statutory maximums. In 2008 the IRS updated these guidelines, explaining that the maximum FBAR penalty amounts can “greatly exceed an amount that would be appropriate in view of the violation.” It required examiners to apply even lesser penalties or a warning letter in lieu of penalties in many cases. It explained that applying multiple FBAR penalties is to be “considered only in the most egregious cases.” Because the statute only specifies “maximum” FBAR penalty amounts that the IRS “may” impose, it would be inconsistent with the statute for the IRS to assert the maximum penalty amounts in every case. Some have gone so far as to suggest that in the absence of these taxpayer-favorable IRM provisions, the FBAR penalties can be so disproportionate as to violate the excessive Fines clause of the eighth amendment to the U.S. constitution. Thus, examiners have long been required (under “existing statutes,” as implemented by the IRM) to assert FBAR penalties of significantly less than the statutory maximums in all but the most egregious cases.
As discussed in the Memo to the commissioner, even if the IRS chooses to ignore the damage caused by its reversal on FAQ #35, it must clarify its seemingly inconsistent statements about what people should do if they learn they have inadvertently failed to file an FBAR. In an effort to encourage taxpayers to enter into the OVDP and OVDI, the IRS emphasized that severe FBAR penalties that could apply outside of these programs, suggesting that the more reasonable provisions of the still-current IRM might be obsolete, and that those making “quiet” corrections might be subject to more severe penalties than they had been in the past. TAS, American Citizens Abroad (an organization representing Americans overseas), and the U.S. ambassador to Canada have been receiving complaints from people who inadvertently failed to file an FBAR and are confused and worried about how the IRS is administering FBAR penalties both inside and outside of the voluntary disclosure programs. Many are under the impression the IRS will always seek to apply the maximum FBAR penalty applicable to willful violations, regardless of the situation. the U.S. ambassador to Canada reportedly sought to reassure them, stating:
[the United States] government isn’t out to get honest “grandmas” who don’t owe anything to the internal revenue Service….My message on this is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible. The IRS is exploring ways to accommodate the roughly one million dual Canadian- American citizens living here.
For nearly two months the IRS responded with deafening silence. As the press continued to repeat the IRS’s tough talk about how seemingly minor FBAR violations could trigger draconian penalties and dual citizens tearfully described to reporters how the IRS was actually seeking such outrageous penalties, the IRS declined to comment. Finally, in early December, as this document was in-route to the printer, the IRS posted some guidance on its website, which suggested that it might still apply the reasonable provisions that appear in IRM 2.26.16, and that it might issue additional guidance. The U.S. ambassador to Canada announced that the guidance would waive penalties against inadvertent late-filers and also allow those who took part in the OVDI and OVDP to get money back, as recommended by the National taxpayer advocate. While the IRS-released fact sheet is helpful, it has not been vetted like changes to the IRM or items published in the internal revenue Bulletin, and the IRS would be the first to point out that taxpayers generally cannot rely on fact sheets and press releases. As of this writing, we do not know what other steps the IRS will take to address the problem.”

To read the report go to: http://www.taxpayeradvocate.irs.gov/userfiles/file/2011_ARC_MSP%2012.pdf

As is well known Taxpayer Advocate issued a TAD against the IRS to allow “reasonable cause” arguments to be made without an “opt out” in OVDP 2009. This was discussed in numerous places including:

Taxpayer Advocate vs. The IRS – It’s A Question Of Trust

This issue raises questions that go to the very core of whether taxpayers and the legal community can trust the IRS. For those who don’t know about this issue, I suggest that you read the above article.

Commissioner Shulman was required to respond by  January 26, 2012. There is no indication that he has responded. If he has responded the decision is unknown to the public. It appears that:

“The IRS continues to respond with deafening silence!”

What do you think Commissioner Shulman’s decision was or will be?