In the Report at pp. xxxiv and xxxv, the Taxpayer Advocate criticizes the IRS's implementation of its statement in the 2009 OVDP that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.” The IRS did the old bait and switch on that seemingly clear statement. The Taxpayer Advocate lays it out pretty well in her report. The relevant excerpt (with footnotes) is here. I have cut and paste the relevant excerpt without the footnotes are follows:
K. IRS’s Inconsistency and Failure to Follow Its Published Guidance Damaged Its Credibility With Practitioners Involved in the Offshore Voluntary Disclosure Program
U.S. persons are generally required to report foreign accounts on Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (FBAR) and to report income from such accounts on U.S. tax returns. The IRS “strongly encouraged” taxpayers who failed to file these and other similar returns to participate in the 2009 Offshore Voluntary Disclosure Program (OVDP ), rather than quietly filing amended returns and paying any taxes due.136 It warned that those making “quiet” corrections could be “criminally prosecuted.” OVDP participants would generally be subject to a 20 percent “offshore” penalty in lieu of various other [*xxxv] penalties.137 The IRS announced, however, that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”138 Taxpayers who would not be subject to significant penalties because their violations were not willful, or because they qualified for the “reasonable cause” exception, believed this statement applied to them.Addendum on 7/1/11: Tax Notes Today published an article yesterday titled Jeremiah Coder, Taxpayer Advocate Issues Assistance Order on Offshore Cases, Criticizes Disclosure Program, 2011 TNT 126-1 (6/30/11) which discusses the Taxpayer Advocate's report on the IRS's bait and switch. (The article is available here with permission of Tax Analysts, the publisher of Tax Notes Today.) In addition to the Taxpayer Advocate report, Coder confirmed "The Taxpayer Advocate Service (TAS) has issued at least one taxpayer assistance order (TAO) to the IRS involving an offshore account disclosure." There is no indication as to the precise nature of the TAO.
On March 1, 2011, more than a year after the 2009 OVDP ended, the IRS “clarified” its seemingly unambiguous statement.139 It would no longer consider whether taxpayers in the 2009 OVDP would pay less under existing statutes on the basis of non-willfulness or reasonable cause. Such taxpayers could either agree to pay more than they believed they owed or withdraw from the 2009 OVDP and face the possibility the IRS would assert massive civil penalties and seek criminal prosecution. Both options were problematic. Withdrawal would waste all of the resources already expended on the 2009 OVDP application and would not bring the taxpayer closure or certainty, as advertised. Moreover, in any future examination the IRS might have to request and review the items that were before the examiner processing the 2009 OVDP submission.140
Pressuring taxpayers who would pay less under existing statutes to remain in the program and pay more than they believe they owed was even worse. It violated longstanding IRS policy along with most conceptions of fairness and due process.141 The IRS’s inconsistency and failure to follow its published guidance damaged its credibility with practitioners and could be subject to legal challenge.142 In 2011, TA S will continue to communicate with taxpayers and practitioners to determine the impact of the IRS’s apparent reversal, advocate for the IRS to abide by the plain language of the original terms of the OVDP (as reasonably interpreted by the public and many of the IRS’s examiners), and document our findings in the National Taxpayer Advocate’s 2011 Annual Report to Congress.143