# Becoming compliant with IRS



## LC3622

Happy New Year to All!

I am a new poster here and found this forums just today. Unfortunately, I recently became aware that I need to file US tax returns even though I left the US in 2006 and have never worked in the US since then. I always thought that you pay taxes in a country where you actually live/work and the whole concept of being taxed on a worldwide income even if you live abroad for years is not clear to me. US seems to be one of a few country in the world which taxes its citizens for life, no matter whether they have ever stepped on US soil. 

Anyway, I am in a situation where I really would like to become compliant and am scared of IRS and the penalties it may impose. I worked abroad all these years and have not filed any tax returns since 2006 as I did not know i have to do it and thought that since my income was lower than the amount of the FEIE, I am not required to file as I do not generate any income from the US source and my AGI is zero after I apply FEIE. I am pretty much sure I will not have to pay any federal income taxes due to the FEIE, but a thought of being not compliant with IRS policy makes me very nervous. I looked at the 1040 and 2555 instructions, but they are not very clear - thus, I have the following questions:

- What is more practical: going through the full voluntary disclosure program or through a streamlined process? As noted before, I do not think I owe any federal taxes, but would like to become compliant with US laws

- What about Social Security taxes? Do I need to pay them for all these years as well?

- How will I know that IRS has no issues with my returns after I file?

- On line 7 of 1040, do we report "gross income" per contract or "net income" actually received?

Also, I am due for promotion later this quarter and my gross income will indeed be higher than an FEIE. I just want to understand how this works in the future and what taxes I may need to pay. For example, for illustration purposes, assume USD 120,000 annual income and USD 100,000 exclusion amount. This will mean that I will have USD 20,000 AGI after I deduct FEIE amount from my gross income. Am I taxed on USD 20,000 or am I allowed to take standard deduction and personal exemption to reduce the taxable amount further? Are these deductions available from AGI if I elect to use FEIE?

Many thanks indeed to all. Didn't expect this nightmare to start so early in the year.


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## Nononymous

Just remember, millions of people are in the same boat. So don't panic.

You have the option of remaining non-compliant, as many folks (including myself) have chosen to do. Though if you have only US citizenship, and a US birthplace, I wouldn't recommend that. (It's a bit different if US citizenship is an annoying accident of birth, and you are also a citizen of the country in which you live.)

I would stay the hell away from OVDI, based on what I've heard. If you want to become compliant, use the other process, or just quietly file three years worth of returns (pros and cons to this approach).

In principle you should not owe any money, now or going forward. If your income exceeds FEIE, you can credit foreign tax paid against US tax owed, and presumably those rates are higher in the UK than in the US. And I suspect you do not pay US social security taxes if you've been paying into the UK equivalent.


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## LC3622

Thank you for your response. Remaining non compliant is not an option for me - I have not done anything wrong and I do not owe anything to the United States, so I do not want to be stressed about this situation. I want to take the appropriate route to become compliant and file tax returns as per requirements each year starting now. 

I have nothing to hide from the United States. Even though I think the tax code is pathetic and it should not be IRS business what people make, own or how much they spend in other countries, these are the rules of the game and I want to follow them. I accept it was my fault not to become familiar with the tax code.

The other process - you mean the streamlined disclosure?


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## Bevdeforges

Don't feel like the Lone Ranger - there are LOTS of folks out there who only just "find out about" the obligation for US citizens to file from overseas after years living outside the US. 



lucenet said:


> - What is more practical: going through the full voluntary disclosure program or through a streamlined process? As noted before, I do not think I owe any federal taxes, but would like to become compliant with US laws


As Nonymous says, I would stay away from the formal "disclosure" process in any form as long as you don't owe any (or much) in taxes to the US. For a long time there has been a sort of informal process by which, if you file the current year plus three years before that, and you owe no taxes (or no more than a couple hundred $ or so) you'll be considered square with the IRS for the past "sin" of non-filing. Or, just start filing the current year and see what they say.



> - What about Social Security taxes? Do I need to pay them for all these years as well?


Don't worry about these unless you meet some very specific conditions - like you're working for the US government overseas (and they should have known better) or you aren't working on a local payroll (i.e. you are being paid directly from the US without having to pay local social insurances).



> - How will I know that IRS has no issues with my returns after I file?


This is the original "no news is good news" - basically, the IRS usually doesn't say anything, even if you backfile a couple of years. But if they don't come back to you, it means they just filed your forms away and are happy.



> - On line 7 of 1040, do we report "gross income" per contract or "net income" actually received?


You want to download and read Publication 54 from the IRS website. It explains all that good stuff. You always report your employment income gross - the US doesn't let you deduct any social insurance payments like most European countries do. 

You might want to check out one of the online tax preparation sites (like TurboTax or TaxAct) or download the software that is available. Makes life much easier, at least the first time through! On most software for taxes, you need to report your gross income from employment on something called a FEC - usually hidden away somewhere under "Other income" or "Other employment income" or "Income from a Foreign Employer." 



> Also, I am due for promotion later this quarter and my gross income will indeed be higher than an FEIE. I just want to understand how this works in the future and what taxes I may need to pay. For example, for illustration purposes, assume USD 120,000 annual income and USD 100,000 exclusion amount. This will mean that I will have USD 20,000 AGI after I deduct FEIE amount from my gross income. Am I taxed on USD 20,000 or am I allowed to take standard deduction and personal exemption to reduce the taxable amount further? Are these deductions available from AGI if I elect to use FEIE?


Probably easiest if you use one of the free tax preparation sites (or download the software). Basically, you apply the standard deduction and personal exemption against your AGI - after you have excluded the FEIE. In a somewhat simpler case, for those of us who make well under the FEIE max, but have "unearned" income (like bank interest) to report, the standard deduction and personal exemption wipe that out so that our final tax bill is 0.

You actually can itemize deductions if you so choose - but in that case you have to apportion your itemized deductions between the excluded income and the excess. In your example, say you had $30,000 in itemized deductions. You'd apportion $25,000 in deductions to your excluded income ($100,000) and $5000 to your excess $20,000. 

But, if you take the FEIE, you can also use the Foreign Tax Credit to offset taxes you paid in your country of residence against the excess. (See Pub 54 for how this works - or else play with the tax preparation software.)

Or, if you prefer, you can not use the FEIE at all, and just do up your taxes "the old fashioned way" and then take the Foreign Tax Credit for all income taxes paid in your country of residence against anything you owe to the US. 

The key thing is to get the current year's forms filed (i.e. 2013) by the June 15th deadline (you get two extra months for being overseas). If you owe nothing on those forms, you can decide if you want to go back and file the prior three years (2012, 2011, and 2010). 

The other things, though is filing the FBAR forms for your non-US bank accounts (assuming the aggregate high balance exceeds $10,000). For those, you are supposed to go back 6 years to get compliant.
Cheers,
Bev


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## LC3622

Bevdeforges, 

Many thanks for very good guidance. I read information booklets from IRS, but they are really confusing, so sometimes it is good to double check with the others. 

However, what about the penalties for late filing? My understanding is that if you file late, you must pay at least USD 135 fine for late filing per each return? How will IRS know that I want to get compliant if I just submit the tax returns without actually marking "streamlined process" or explaining why I am submitting them? The same refers to FBARs.


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## Bevdeforges

No, the penalties for late filing are supposed to be based on the amount of taxes due. If you owe nothing, then the penalty is x% of 0 which is 0. You could attach a note to the return stating that you just learned of the filing requirement for overseas residents - and that you plan on filing the prior three years (or whatever). The statute of limitations on tax returns is something like 3 or 4 years - so if you prove that you don't owe anything for the past 4 years, they usually let you go (unless you indicate something on your returns that looks "fishy" or like you might be hiding something). 

The IRS also has the ability to waive all penalties and late fees if they so wish, so the theory is to be contrite and show them that you don't owe them anything.
Cheers,
Bev


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## LC3622

Bevdeforges said:


> No, the penalties for late filing are supposed to be based on the amount of taxes due. If you owe nothing, then the penalty is x% of 0 which is 0. You could attach a note to the return stating that you just learned of the filing requirement for overseas residents - and that you plan on filing the prior three years (or whatever). The statute of limitations on tax returns is something like 3 or 4 years - so if you prove that you don't owe anything for the past 4 years, they usually let you go (unless you indicate something on your returns that looks "fishy" or like you might be hiding something).
> 
> The IRS also has the ability to waive all penalties and late fees if they so wish, so the theory is to be contrite and show them that you don't owe them anything.
> Cheers,
> Bev


I read a publication on 1040 earlier and it was clear that IRS can charge a fine which is higher of usd135 or a penalty for each tax return filed more than 60days later than the filing deadline. However, my main concern is FBAR - I never had any clue I am required to file one if I live abroad. Obviously, I have some foreign accounts as I live abroad and there are some balances for saving and down payment for a house. I am afraid they will penalise me once I file. This is ridiculous...


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## FFMralph

Bev is right. Just quietly file and add a statement that you were not aware of your requirement. If you owe nothing, you will not pay any penalties. If you do owe, I would even go back 6 years. The IRS generaly goes no further back more than 6 years. This way they can only charge interest on the due tax. If you dont file and they require you to do so, then you can get hit with severe penalties.

I filed six years after 30 years of non-compliance and never heard a word about it.

Different is with FBAR. If you have a FBAR reporting requirement then do so as soon as possible. If not, the foreign banks will soon start informing the IRS.


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## Nononymous

With FBAR, there are basically zero reports (on the forum and elsewhere) of ordinary folk being penalized for failure to report. (It's also not clear how the US would ever collect said penalties, but that's another issue.) With FATCA coming down the pike, you can't really hide if you opened an account with a US passport, so might as well get it done.


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## Bevdeforges

The one thing with FBAR is that since last July or so, they will ONLY accept electronic filings. I've heard conflicting reports about whether you can back file using the online site. BSA E-Filing System - Welcome to the BSA E-Filing System

It's not the warmest and fuzziest site, but check what they say about back filings and go from there.

The key thing is to make sure you declare the interest on your tax returns for the bank accounts you declare on the FBAR filings. Not that they actually check these things that closely - but it should help you sleep at night. To a large extent, it can depend on what country your foreign bank accounts are in. But normally, if there are questions, they'll come back to you directly with questions before swooping down and hitting you with penalties.
Cheers,
Bev


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## maz57

If the US government wants people to file those FBARs, they'd better come up with a less sinister name than "Financial Crimes Enforcement Network". I took one look at that website and vowed that I would never register as a financial criminal. 

What's really criminal is how they treat honest law-abiding folks who have recently learned about about all the ridiculous US tax laws and are trying to do the right thing and become compliant. And to force people to trust a certain incredibly vulnerable browser to transmit all of their sensitive financial information is just plain stupid and risky. It was bad enough when it was all done by paper, but this new system is an identity theft toolkit.

Anyone who files an FBAR is by definition not a criminal.


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## DavidMcKeegan

Yes, with regards to the FBAR's, I have not seen anyone get hit with a penalty for voluntarily coming forward with them. I think the hefty fines and penalties you read about on IRS/Treasury websites are reserved for those they "catch" purposely not disclosing.

Reading through all of these posts, I think that your questions are answered very well (this is a really knowledgeable forum). My two cents are just to go ahead and become compliant before things get complicated (i.e. you begin to make more money). You likely will not owe anything, so I would just file the last three years of returns (include a letter explaining that you were not aware of the requirement to do so-more of a good will gesture than anything), along with the six years of FBAR. From there, just continue to file as normal. 

As it can be quite a lot of paperwork filing multiple years, I wouldn't hesitate to work with an expat accountant throughout the process. Then, should you wish to file yourself in future years, you can use the accountant prepared forms as a guide.

I hope this helps, good luck!


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## Bevdeforges

Agree wholeheartedly with maz57 that the assigning of FBAR e-filing to the Financial Crimes Enforcement Network is a major turn-off. And frankly, the whole "e-filing is mandatory" thing this year is a royal PITA. 

I'm thinking here of a friend here who has no Internet at all, and no need to file US tax returns (insufficient income for her age and filing status), but one big account in Europe that means she has to report everything on the FBAR. I've helped her with her filings the last couple years - her husband used to handle all their tax stuff for the US and she has no idea what (or even whether) he filed in past years. The first year, I just did the FBAR forms for her and she signed them and mailed them in. Never heard anything from Treasury (or the Financial Crimes Enforcement Network or whoever). Now we just have to figure out how to do her FBARs for this year - either she writes them a letter explaining she has no computer, no Internet and asking for exemption from the policy, or I guess I can do them online for her after we do them manually together. 

But, you do have to remember that the FBAR is strictly an information filing. They don't normally link it to your income tax filing unless something looks "funny." And I assume my friend isn't the only person who reports foreign accounts with large balances, yet who has insufficient income to file a tax return.
Cheers,
Bev


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## LC3622

DavidMcKeegan said:


> As it can be quite a lot of paperwork filing multiple years, I wouldn't hesitate to work with an expat accountant throughout the process. Then, should you wish to file yourself in future years, you can use the accountant prepared forms as a guide.
> 
> I hope this helps, good luck!



Thanks. Actually, 2555EZ and 1040 are not that difficult to file in my case. My income is below the exclusion level, and combined interest on all accounts will not be much due to very low interest rates on saving accounts in recent years. Therefore, only interest amount will = AGI. No major concerns and I am pretty sure I do not owe anything.

However, FBARs are very complicated. One really has to disclose a lot of personal information. It is obvious that someone who lives abroad has accounts with foreign banks. The threshold amount of USD10,000 is a joke. If they no longer accept paper based FBARs, how do I send copies of filed FBARs to the IRS together with my prior year returns?

The whole process is very confusing. My situation is relatively straightforward due to age, but I imagine how difficult it is to become compliant for many other people who have been living abroad for many years.


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## FFMralph

Carefull lucenet, the FBARs do not get sent to the IRS. They get sent to the to the Treasury Department at the following address: 

Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621


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## DavidMcKeegan

"If they no longer accept paper based FBARs, how do I send copies of filed FBARs to the IRS together with my prior year returns?"

You shouldn't have to file the FBAR's along with your returns. As the FBAR is a completely separate thing than the Federal returns (goes to a different place as well), they do not need to be filed together.


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## LC3622

Under the streamlined process, They require copies of filed fbars for the past 6 yrs.


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## Bevdeforges

If you have been filing FBARS for the last 6 years, you have no need of the "streamlined" process. You're already compliant.

Yet another argument for eschewing the streamlined process altogether and just doing a "quiet" filing to get back with the program.
Cheers,
Bev


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## Nobledreamer

I haven't heard of anyone getting slammed for FBAR except those unfortunate souls who entered OVDI. I also haven't heard of anyone being hassled about quiet disclosure. If you don't owe, there isn't a penalty so quiet disclosure shouldn't be a problem. I had no problem at all, nor did my son.


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## BBCWatcher

And if you are participating in the streamlined process (I'm a fan), here's the answer to the question: you make your required FBAR e-filings and also send printed copies to the IRS.


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## the_mighty_tim

Hi all

On a slightly related note, I too have just realised I should have been tax compliant (moved to the UK with my British parents from the US when I was 7 - so it really didn't figure high on my radar at the time!)

Anyway, I've gone through the streamlined service and assembled all the forms and I've just got to post them. I do have one question. I read earlier in the thread that no news from the IRS is good news. While I take that to be a good thing, is there anyway I can find out that they actually received the paperwork? The IRS won't get funny if I send it recorded/registered delivery will they?

I only ask because it's a set of very important documents that I don't want to get lost somewhere in the Trans-Atlantic Mail Vortex.

Thanks in advance!


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## BBCWatcher

Registered mail is perfectly fine.

You can also apply for a "tax transcript." The IRS charges nothing for those. I'd wait at least 90 days after the IRS receives your returns, then send a transcript request.


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## the_mighty_tim

Hello, me again.

So, I sent off my streamlined tax returns to the correct address, using tracked registered mail so I could ensure it arrived at the destination.

After sitting in Chicago airport for nine days for some reason, it finally went off to Austin yesterday, where it was due to be delivered today.

Except that, for some reason, the USPS tracking system said it was "undeliverable as addressed". I verified the address numerous times before sending it, so it has to be correct.

The USPS tracking site seems to claim it'll be coming back to me. That's no good. I need those forms arriving at their destination ASAP. I thought I'd had enough stress with the tax situation in the first place, and now this?

Has anyone else had this happen to them? Or am I just unlucky? Or could it be a glitch or some other problem?


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## Nobledreamer

Which address did uyou use? The IRS does not like to receive anything via street address due to the fellow who flew a plane into the Kansas City office several years ago.


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## the_mighty_tim

Nobledreamer said:


> Which address did uyou use? The IRS does not like to receive anything via street address due to the fellow who flew a plane into the Kansas City office several years ago.


I sent it to the address as shown on the IRS website under "Instructions for New Streamlined Compliance Procedure" (I can't post a link as I do not have enough posts yet!)

This was the same address my tax advisor sent me, and I also looked it up on Google Maps. When addressing the envelope, I checked it two or three times, then had somebody read it out so I could further verify it. 

I don't want all the time, effort, stress, sleepless nights and money I poured into this endeavour undone because of some balls-up at the USPS. 

The silver lining, such as it is, is that I do have copies of all my forms, so I could theoretically resend them if needs be. But as it's 90+ pages of exciting tax fun, it's not something I want to do unless absolutely necessary.


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## BBCWatcher

Did you add a "signature required" service? For future reference, don't do that. Stick to plain, ordinary registered mail.

The IRS's instructions were reviewed and perhaps updated earlier this month, so check to see if that mailing address has changed. (It's very near the bottom of the page.)


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## the_mighty_tim

BBCWatcher said:


> Did you add a "signature required" service? For future reference, don't do that. Stick to plain, ordinary registered mail.
> 
> The IRS's instructions were reviewed and perhaps updated earlier this month, so check to see if that mailing address has changed. (It's very near the bottom of the page.)


I sent it through registered post. I don't recall asking that a signature be required when I was at the post office. The address I sent it to is indeed the one on the link you posted.


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## BBCWatcher

OK, let's see what happens. Hang onto your mailing records. If there's any future penalty/interest that depends on the date of this mailing, you're not liable for the IRS's or the USPS's screwup. The IRC requires the IRS to treat your properly addressed registered mail as timely filed even if they didn't get it or lost it.

Yes, you may have to resend -- let's see what happens -- but that's the worst that can happen here.


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## the_mighty_tim

BBCWatcher said:


> OK, let's see what happens. Hang onto your mailing records. If there's any future penalty/interest that depends on the date of this mailing, you're not liable for the IRS's or the USPS's screwup. The IRC requires the IRS to treat your properly addressed registered mail as timely filed even if they didn't get it or lost it.
> 
> Yes, you may have to resend -- let's see what happens -- but that's the worst that can happen here.


Thanks for that. That's fairly reassuring. In the meantime, I'll keep checking to see what happens.


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## emmarshy

... sorry wrong thread, deleted message


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## the_mighty_tim

Good news!

According to the USPS tracking website, my package of tax forms arrived yesterday morning at their destination. I wonder if the email I sent USPS on Sunday gave them a boot up the backside.

Anyway, I know they are there now, so now to play the waiting game.


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## the_mighty_tim

Well, it's been over 90 days, and I've not heard anything from the IRS. So far, so good right?


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## Bevdeforges

No news is generally good news from the IRS - though they don't really have a time limit in these matters.
Cheers,
Bev


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## Vangrrl

I heard from Dept of Treasury 6 or 7 months after submitting 5 years of late tax returns and FBARs. 

It was a letter letting me know I had submitted the wrong version of a form for one of the years and a request to resubmit it using the correct version. So I would infer that it took them 6 months to even look at my submission. 

I submitted the correct form and never heard back. I've never heard from the IRS.


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## maz57

That's kind of funny. I'm assuming you must have used the wrong year FBAR form. I guess it never occurred to anyone at "headquarters" to simply write in the correct year and call it good but at least it shows someone looked at them.


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## BBCWatcher

It probably occurred to them, but legally (quite rightly so) they have no power to amend a filing.


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## Vangrrl

Actually what happened was that there was a form change between 2007 and 2008. When I backfiled I used the newer version of the form for 2008-2011 but used the older form for 2007. Apparently you don't do that. You use the most recent form even for older filings. I believe it had to do with the current form being scannable. So gave me back my old form and a blank copy of the new form. I filled it out by hand and sent it back.


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## BBCWatcher

And all is well in the world, and the U.S. Treasury can now record you as having filed for all those years. Good news.


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## maz57

In view of the fact that filing an FBAR for the same old boring accounts year after year is an exercise in futility the other thing they could have done is nothing. On second thought, nah. This is the government we're talking about here. 

Curious, though, they wanted the later forms for past years; usually they want the form to match the year. And if they didn't want people to use them, why have them available at all? But its all academic now with the electronic filing.


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## BBCWatcher

maz57 said:


> In view of the fact that filing an FBAR for the same old boring accounts year after year is an exercise in futility the other thing they could have done is nothing. On second thought, nah. This is the government we're talking about here.


Hang on, Maz57. Yes, this is the government we're talking about here, and thus I think you've got it exactly backwards.

Do you _really_ want Bureaucrat #1 on a Tuesday deciding to amend the form you filed? With Bureaucrat #2 next Friday deciding to pursue enforcement and prosecution because of the filing Bureaucrat #1 improperly and incorrectly amended?

Or do you really want Bureaucrat #1 on a Tuesday deciding that you didn't actually file for Year X (and not telling you you didn't file properly) because the obsolete form is no longer acceptable even for a back filing, then Bureaucrat #2 next Friday deciding to pursue enforcement and prosecution because you didn't make a timely filing?

No thank you, I don't. The U.S. Treasury's staff handled this situation the only way they could or should: politely notify the filer that the filing contains an error (wrong form in this case), then give the individual ample opportunity to refile and thus settle the matter without incident, penalty, or cost. Excellent, perfect, beautiful -- _thank you_.

It's a legal filing, under penalty of perjury! Please, we do not want random workers handling these filings in any other way except in this way. This procedure was entirely proper and correct, and the correct reaction should be, "Thank you for looking out for my legal interests." Vangrrl is now recorded in the books as having properly filed for 2007, and no other bureaucrat or agency has the option to question that fact. Everybody did what they were supposed to do. If I made a mistake (intentional or not), _*I*_ want the opportunity to correct it -- not anybody else on my behalf, because they'll probably screw it up then create hassle and agony for me.

Be very, very careful what you wish for. I think you're way off base here.


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