In practice, FAQ 35 of the 2009 OVDP provided an opportunity to explain unique circumstances supporting an offshore penalty resolution different that as specified in the 2009 OVDP. Specifically,
Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes. If the taxpayer disagrees with the IRS’s determination, as set forth in the closing agreement, the taxpayer may request that the case be referred for a standard examination of all relevant years and issues. At the conclusion of this examination, all applicable penalties, including information return penalties and FBAR penalties, will be imposed. If, after the standard examination is concluded the case is closed unagreed, the taxpayer will have recourse to Appeals.
Under the 2009 OVDP, some matters were resolved utilizing offshore penalty determinations that were significantly less than as set forth in the 2009 OVDP. Subject to review by IRS technical advisors, examiners made penalty determinations on a case-by-case basis. However, some practitioners made “FAQ 35 submissions” for penalty relief in every case, regardless of the underlying factual scenario. As such, it became increasingly difficult to have unique factual situations properly considered by the IRS.
Following announcement of the 2011 OVDI, the IRS began eliminating agent discretion in the administration of open matters submitted under the 2009 OVDP. Instead, representatives have been advised that FAQ 50 of the 2011 OVDI has replaced FAQ 35 of the 2009 OVDP, unless “substantial information” supporting the FAQ 35 was provided before the February 8, 2011 announcement of the OVDI.Addendum 6/2/11: Asher Rubinstein has prepared a succinct analysis of the FAQ 35 issue for viewing at his firm's website: http://www.assetlawyer.com/. Asher's article can be found here: http://www.assetlawyer.com/wordpress/?p=906
How could that be? Certainly, taxpayers submitting an application under the 2009 OVDP have the right to have the 2009 FAQs applied to their matter. Eliminating FAQ 35 consideration for taxpayers who submitted an application under the 2009 OVDP is simply unacceptable and does not support the perception of fairness in tax administration. It is believed that the foregoing is currently under reconsideration by the IRS.
Of course, the 2009 OVDI makes explicit that the IRS will use as the benchmark the maximum FBAR penalty with no discretion in the agent.
Asher's article discusses the revocation of FAQ 35, and what this means for voluntary disclosure taxpayers.
I add some links some of the earlier comments on FAQ 35 under earlier blog entries:
Asher Rubinstein said...
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My experience is that the IRS has been more receptive to an FAQ 35 argument than a 5% penalty request. I've had more success in getting the IRS to impose non-willful penalties of up to $10,000 per year, pursuant to 2009 OVDP FAQ 35, than going from 20% to 5% of the aggregate account balance under 2011 OVDI FAQ 52. Of course, that FAQ 35 non-willful penalty is now, under the 2011 OVDI, off the table. See my comment on this further below.
May 24, 2011 10:03 AM
Asher Rubinstein said...
2. Anonymous on May 20 at 10:32 asked about appeals. Anonymous correctly notes that an appeal would cost the taxpayer money, time and a lot more hassle.
I had an OVDP case where the IRS was clearly over-reaching because of the amount involved. In that case, the 20% penalty alone was over $1 million, and the IRS did not want to let that amount go. But the facts were excellent for a reduced non-willful penalty of up to $10,000 per year; FAQ 35 was still in effect at the time.
One strategy would have been to reject the $1M+ penalty, submit to a full audit, and then recourse via appeals and even litigation. On that last point, we felt that there was little chance that a court would find willful tax avoidance. We felt that there was a good chance that a court would find against the IRS based on the facts. But an appeal and litigation would have cost taxpayer more time, money and aggravation, and although the chances were good, there is no guarantee in litigation. Moreover, a full audit might have turned up other headaches. Taxpayer paid the $1M+ penalty rather than challenge the IRS, even though the facts were on taxpayer's side.
May 24, 2011 10:15 AM
Asher Rubinstein said...
4. As to the "bait and switch" comments, I was very surprised that the IRS rescinded FAQ 35 after the announcement of the 2011 OVDI, even to taxpayers who disclosed under the 2009 OVDP. Taxpayers who disclosed under the 2009 OVDP, did so on the basis of the applicability of FAQ 35 (as well as any and all other guidance issued by the IRS with respect to the 2009 OVDP). One must question whether subsequently, and retroactively, denying such taxpayers the opportunity to benefit from FAQ 35 is in fact a "bait and switch". One must also question whether such a policy violates legal precedent which prohibits the IRS from issuing rules and setting policies on a retroactive basis.
May 24, 2011 10:42 AM
My understanding is that FAQ 35 was revoked if the person in OVDP 2009 had not mentioned this possibility to the agent before Feb 2011.
I don't know if there was any existing case where FAQ 35 was withdrawn if it had been asserted earlier than Feb 2011.
May 24, 2011 2:30 PM
Let me add my sobering experience with the infamous 2009 FAQ 35 if it is of any benefit to anyone considering the 5% rule.
In Oct, 2009, I wrote Commission Shulman to express concern that the OVDI penalty was disproportionate for expats and immigrant "Minnows”. We were not the Big Whale tax cheats trying to hide unreported funds in overseas secret accounts. If you remember, with all the UBS fervor, this is how the program was marketed in all press accounts.
I feared that Minnows, were by-product catch of a finely woven net designed for the UBS type Whales. We were entering a giant fish processing plant from which the Whales would emerge without any life altering financial consequences. The Minnows on the other hand, would be ground up and spit out as fertilizer. I hoped I was being hyperbolic at the time. Actually, I may have understated the reality.
I received a reply on April 1, 2010 from a Kevin McCarthy, Acting Director, Fraud/BSA Small Business/Self-Employed Division. He politely talked about the needs for fairness and compliance, and described the salient objectives of the program. He separately and specifically restated FAQ35 that “under no circumstances must a taxpayer pay a penalty greater than what he or she would otherwise be liable for under existing statutes.” It was that language that gave a lot of us hope that some discretion would actually apply for Minnows.
Due to IRS delays, it took a year and 1/2 to get my OVDI penalty outcome. I received my form 906 in early March 2011. It was the shock of my life when they included the value of my home, where I am living overseas, in my highest aggregate total.
The reason they gave, was that since it had some causal holiday rental income (even without substantive tax impacts), it still put me in the technical category that allowed them to asses the penalty. I guess any income even minor amounts give them the opportunity to reach deeper into your pockets. It doubled my OVDI penalty. Ouch!
IRS Agent, to her credit, was sympathetic to my cries of pain. She openly admits this program was not designed for me, and tried twice with her technical advisor to get it removed, but to no avail. No discretion, you know!
I subsequently asked for FAQ 35 consideration, but agent says she is unable to, as it was rescinded in Feb, but she can't produce anything in writing that says that. I see all the comments around the web that it is so, but I don't see it specifically spelled out, and on the IRS web site, FAQ 35 for 2009 OVDI is still there.
May 29, 2011 8:28 AM