'Will you walk into my parlour?' - #Americansabroad and IRS "amnesty" offers in the 2009 #OVDP

It has been widely reported that a U.S. citizen residing in Toronto, Canada since 1971, paid a $133,000 U.S. dollar penalty for failing to file IRS forms disclosing that he was running a business through a Canadian corporation. How did this fly get caught in the spider's web?

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  1. The Spider and the Fly is a poem by Mary Howitt (1799–1888), published in 1829. The first line of the poem is "'Will you walk into my parlour?' said the Spider to the Fly." The story tells of a cunning Spider who ensnares a naïve Fly through the use of seduction and flattery. The poem is a cautionary tale against those who use flattery and charm to disguise their true evil intentions.
  2. Once upon a time, in 2009 the "spider" invited people into (what was described by the media) as an "amnesty" program. The "spider" enlisted the help of the "media" who were quick to proclaim this wonderful offer of "amnesty". (Oxford defintion of "amnesty" is: "An undertaking by the authorities to take no action against specified offences during a fixed period.") The "amnesty" was the 2009 "Offshore Voluntary Disclosure Program" better known as OVDP.
  3. The lawyers did their part in advertising the "amnesty". At least this lawyer noted that the "amnesty" was really just a promise (if the "spider" could be trusted) to not pursue criminal charges. Since, the offer was to NOT pursue "criminal charges" one would think that the program would be ONLY for those who were criminals. Americans abroad are not criminals.
  4. Q. How did the "spider" describe the 2009 OVDP program? A. Participants were agreeing they had used offshore accounts to avoid or evade taxes and they were asking to pay penalties. What follows are sections from the IRS FAQs.
  5. And on how the penalties were to be calculated ...
  6. The obvious question: Why would an advisor recommend that a "middle class" Canadian enter this program under any circumstances? Do you believe that "middle class" Canadians are using Canadian bank accounts and corporations to avoivd or evade taxes? In addition, look at the magnitude of these penalties!!!!!!!!!!!!!!!
  7. A possible (but still unlikely) answer: The IRS appeared to be saying that the penalties would not "under any circumstances" exceed the the penalties owing if one had NOT entered OVDP. Hmmmmmm ....
  8. But, notice this says that under standard audit, "all applicable" penalties will be imposed. But, penalties are subject to "reasonable cause". At what point is "reasonable cause" considered? Before the 20% penalty is imposed or AFTER rejection of the 20% penalty. This is the key issue.
  9. Who could have known? The "spider" decided that "reasonable cause" would be considered ONLY after the "fly" rejected the 20% penalty. This was the context that Donald Dewees found himself in AFTER he had entered OVDP 2009. This is what led directly to his unfair penalties. Comments from the IRS Taxpayer Advocate include:
  10. But, now let's learn more about Mr. Dewees and his situation as described in lawsuit against the IRS to recover his penalty payment. Mr. Dewees was NOT successful as described ...
  11. Introducing Mr. Donald Dewees: These facts are inferred from the description on Jack Townsend's blog and from the actual complaint in his lawsuit against the IRS. Mr. Dewees was born in 1941 in the United States. He moved to Canada in 1971 where he has lived ever since. In 1979 (on the advice of his Canadian accountant) he incorporated a Canadian Controlled Private Corporation. It appears that he had not been filing U.S. tax returns (few Americans in Canada knew that they were supposed to). In late September of 2009 he consulted a U.S. tax specialist. He entered the 2009 OVDP program by the October 15 cut off date. He was initiatlly assessed a $252,000 miscelaneous penalty which was reduced (as a result of IRS error) to $185,000. (Perhaps his lawyer believed that "reasonable cause" would be considered BEFORE the imposition of the penalty (see above). In any event, Mr. Dewees did NOT accept the $185,000 penalty and removed himself from the OVDP program. He then was subjected to the "standard audit" procedures. Under the "standard audit" procedures (after consideration of "reasonable cause") he was assessed a $120,000 penalty (12 years of failure to file Form 5471). The Canada Revenue Agency assisted the IRS with collection (presumably Mr. Dewees was NOT a Canadian citizen). He then sued the IRS to recover his penalties, with the following result.
  12. How could such a horrible thing happen? Why did Mr. Dewees enter the 2009 OVDP program at all? By its own terms (see above) OVDP was for Criminals and not for Canadians! OVDP by its express terms was voluntary. But, some more general observations and questions ...
  13. 1. The earlier that Americans abroad have attempted to come into U.S. tax compliance the worse they have been treated. If Mr. Dewees had come into compliance today he (because of the Streamlined Compliance Program) would have paid no penalties.
  14. 2. Why did the IRS not simply reconsider his case under the current Streamlined Procedures? The result in this case simply shocks the conscience.
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