Wednesday, August 10, 2011

New York State Bar Comments to IRS to Make OVDI Fairer (8/10/11)

By letter dated August 5, 2011, the New York State Bar Tax Section submitted comments to the Commissioner, Chief Counsel and Acting Assistant Treasury Secretary on how to make the OVDI 2011 fairer and more administrable. I encourage readers to review or download the letter here.

The format is to comment on specific FAQs and we encourage readers to review the letter for those specific comments.. Preceding the specific comments is the following:

We recognize that the Service cannot evaluate the willfulness of every taxpayer who wishes to participate in the 2009 OVDP or the 2011 OVDI and that is why the Services has created a mechanism for taxpayers to opt out of the programs and undergo an audit. We agree that, given the large number of voluntary disclosures, this is an appropriate way to evaluate the culpability of particular taxpayers who believe that they did not act willfully. However, we are concerned that certain statements have been made by Service personnel that strongly encourage taxpayers to participate in the voluntary disclosure programs or face maximum criminal and civil penalties under the law. n5 In addition, FAQ 15 states that "[taxpayers are strongly encouraged to come forward under the 2011 OVDI . . . Those taxpayers making 'quiet' disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years." While these statements and procedures refer to taxpayers who have not made voluntary disclosures, taxpayers and practitioners have expressed concern that taxpayers who opt out of a voluntary disclosure program will face the same level of scrutiny and skepticism by the Service as if they had never participated in the program in the first place. Indeed, many revenue agents in the field have indicated that taxpayers who opt out of the voluntary disclosure programs will have a very difficult time convincing the Service not to impose maximum civil penalties.

n5 E.g., "For those hiding assets offshore, there is an obvious reason to come in now. If we find you, you face harsher penalties and the possibility of jail time. If you come in voluntarily, you pay a steep price but avoid going to jail." Commissioner Schulman's Statement on the 2011 OVDI, February 8, 2011; "[H]arsh civil and criminal penalties could await those who engaged in quiet disclosure". Statement attributed to the Service by Robert Goulder in "Quiet Disclosures Get No Love From IRS," Tax Notes May 11, 2010.
As a result, many taxpayers feel compelled to stay in the voluntary disclosure programs and accept inappropriately large penalties because they fear that if they opt out, they automatically will be assessed with huge information return penalties. Even innocent taxpayers with meritorious cases are hesitant to opt out and face crippling assessments that are many times the value of their foreign account and that could render them insolvent in the hope that they can convince an agent that they did not act willfully. To remedy this inequity, we urge the Service to issues guidance clearly stating that, when a taxpayer opts out of either the 2009 OVDP or the 2011 OVDI, evidence regarding willfulness will receive a full and impartial review by revenue agents and any adverse determinations will be subject to full and impartial review by the Appeals Division of the Service.


  1. Good for them. Most interesting read. Maybe this will get the Commissioner's attention. This is not just some group of anti-tax radicals stirring the pot that can be easily dismissed. Certainly individual letters to the Commissioner have no effect. I have written two, and are amongst those small fry from the 2009 OVDP who fear what the Opt Out will bring. I do hope the Commissioner takes notice, but cynically, I fear not. They are in the revenue collection mode, and treating non egregious offenders is not their concern. I think they want as much money as they can squeeze out of you using fear as the tool of choice.

  2. If the Quiet Disclosure is too risky and the Voluntary Disclosure comes with huge penalties in violation of the 8th amendment, then the citizen abroad has but one option: renunciation. It has risks, but fewer, it seems to me than trying to make things right with this IRS.

  3. Where were these comments in Feb? Or during the 2009 OVDI? Too little. Too late. Too easily ignored.

    Grandstanding politicians and a compliant mainstream media have demagogued "evil offshore tax evaders" to the point where distinctions in culpability can no longer be made by the average citizen. For anyone with unreported accounts but minimal or zero actual tax evasion the OVDI spectacle is a witch hunt unworthy of a civilized country. The US should be ashamed.

  4. do you think sending a letter/fax to Nina Olson (TAS) will help....the fear tactics used by IRS should be brought to congress' attention

  5. To Anonymous August 12, 5:19pm...

    YES!! By all means. They are working the issue. The more that contact them/her the better.

  6. isn't FBAR penalty violation of any constitutional right? it is ridiculous that an immigrant who came to the country recently is asked to cough up 25% of his lifelong there any non-profit group that we can contact?

  7. To Anonoymous August 14, 2011 3:34 PM

    I think I have discussed elsewhere in this blog that, at the extremes in the penalty articulated by Congress, there might be constitutional Excessive Fines problems, but the IRS has not yet attempted to go to the extremes. Even in the criminal cases it now brings, it extracts only 50% in the highest year. All other cases get resolved for significantly less. I don't think that these resolutions create constitutional issues.

    Jack Townsend

  8. Watching today's 60 minutes annoys me... US corporations are not taxed for their overseas income...why are we being subjected to such draconian penalties...its so sad

  9. The letter does a great job illustrating open issues and lack of clarity with respect to some OVDI FAQs. I would expect nothing less from Bryan Skarlatos.

    One thought I had while reading the letter was that the letter accepts as non-issues reasonable cause and non-willful arguments within the context of the 2011 OVDI, but makes no mention of the IRS rescinding FAQ 35 from the 2009 OVDP. The letter, in the "Background" section, did state the familiar IRS position that it merely "clarified" its position on not making any determinations regarding willfulness. However, given the egregiousness and unfairness in that FAQ 35 retraction (as Jack, myself and other practitioners have written), it would have been good for this letter to not skirt that issue.

  10. Asher,
    Sorry for not getting this.. can you please elaborate what you mean by: "the letter accepts as non-issues reasonable cause and non-willful arguments within the context of the 2011 OVDI"


  11. Is it possible, that the IRS OVDI guidelines are saying this is not the program for the "non-wilful" folks? I think of this again and again with all the mention of criminal prosecution and comparison to the maximum penalty for "wilful". Even the FAQ 15 & 16 despising quiet disclosures refers to "criminal prosecution for applicable years". Now, that would be applicable only to real crimes one would think...

    So, is IRS subtly saying, if you are not wilful, don't join??

  12. Asher. I see your recent successes on your web site on the OVDP program. Were these the result of successful use of FAQ 35?? It seems to me that they might have been, as where else would you have gotten that discretion if there wasn't an opt out? Just curious..

  13. To Anonymous August 17, 2011 3:36 PM

    I think there is a germ of truth in what you say. But I am not sure that the IRS intended that message. I do think, that in appropriate cases, the right conclusion is not to join. Now, the problem is determining which are the right cases.


    Jack Townsend

  14. "So, is IRS subtly saying, if you are not wilful, don't join??"

    I don't see that at all. The IRS OVDI FAQ 51 specifically gives cases of people who join OVDI with non willful violations, and then opt out. Besides, even non willful penalties can exceed OVDI penalty for small account.

  15. Anonymous, on August 17th at 2:50pm asked:

    Sorry for not getting this.. can you please elaborate what you mean by: "the letter accepts as non-issues reasonable cause and non-willful arguments within the context of the 2011 OVDI"

    In the 2011 OVDI, arguments of reasonable cause and non-willful failure to file the FBAR are not considered by the IRS; they are non-issues.

    In the 2009 OVDP, at first, IRS agents considered arguments of reasonable cause and non-willfulness. Then, mid-through the OVDP, the IRS changed its policy and such arguments were no longer considered. Jack, the Taxpayer Advocate Service, and other practitioners including me have taken issue with that change of policy.

  16. Anonymous, on August 17 at 4:02pm, wrote:

    "Asher. I see your recent successes on your web site on the OVDP program. Were these the result of successful use of FAQ 35?? It seems to me that they might have been, as where else would you have gotten that discretion if there wasn't an opt out? Just curious..."

    Yes, for 2009 OVDP clients, we cited FAQ 35 and presented facts that demonstrated non-willfulness and reasonable cause. As I wrote, consideration of such facts and application of penalties is considerably different under the 2011 OVDI.

  17. Asher. That is what I assumed. Thanks for letting me know....

    Frankly, if the IRS really wanted to separate the wheat from the chaff, Minnows from the Whales, or what ever comparative analogy you want to use; and if this wasn't just a "collect more revenues" effort without regard to the negative unintended consequences, then they would re-instate it, and add it to the 2011 OVDI.

    It seems to me, that this provision was/is the only fair way, without significant revamping of the entire process. Of course that will never happen as they are too vested in the current program. I don't know how else you keep from impacting the small fry in such a very NEGATIVE way.

    Opting Out (even under the new guidelines) is such a regressive and scary option requiring more expenditure in time, money and anxiety, that it doesn't really seem like a tenable alternative.

    If there are still OVDP folks out there that have not paid up on their 906, and did not get FAQ 35 consideration for non willfulness, and should have, I would definitely advise them to make an appeal to the TAS. I would go that route before Opting Out or being forced out. Just my opinion, and of course, I could be wrong.

  18. One prominent practitioner (NOT Asher or Jack) said that he tried FAQ #35 arguments for all of his clients in OVDP. His clients may have been an unusually pristine lot, but I find it hard to believe that they all had a colorable argument for FAQ #35 relief. Perhaps practitioners if had restricted such arguments to cases that were truly meritorious, the IRS might have been less skeptical. Then again, who knows.

  19. If the IRS had been able to recognize "degrees of Willfulness" related to FBAR negligence, or at least consider that many of the OVDP filers did not represent egregiously overt tax cheats, FAQ 35 worked well. Instead the IRS seemed to apply an all guilty approach on "Willful" that was black and white. If you joined, then you must be willful and had a very strict approach to what they consider willful! No shades of gray allowed.

    FAQ 35 consideration was the only venue for smaller offenders to plead for lesser penalties, and could have continued to work very well. Didn’t produce as much initial revenue, but allowed audit agents to dispense with the small fry quickly and move on and spend their time with the real cases where the significant money was.

    The idea of asserting that auditors had no discretion in the entire process is a foreign one, it seems to me. The IRM is all about discretion, so to design a program that removes a key component of measured justice just seems strange. The so called "Fair" penalty equally applied across all classes of failure eviscerated the small offender while turning out to be a pretty good deal for the real Rich Tax Cheat the entire program was designed for in the first place.

    Maybe this prominent practitioner (I have heard this story too) realized most of his clients were in the small time negligent category, and felt rightfully justified in pursuing FAQ 35 relief. It was available, and who knew that the IRS really meant to say, as they assert now, that agents were to supposed to compare the OVDP result to the “Maximum penalties”. Prior to this program, as I understand it, Maximum penalties have not been the norm, but times sure have changed, haven’t they?

    But like you say, who really knows. FAQ 35 is gone, (The TAS does not approve as it destroys IRS credibility, and I agree. ) Now the only choice for the small offender is Opt Out. If there could be some better clarity on that process for smaller folks, it might work out ok, if they don't expend an enormous about of time, energy and anxiety inside the OVDI, only to have to face continued uncertainty and stress to carry on the fight outside the OVDI.

  20. aggrieved-taxpayer@hotmail.comAugust 28, 2011 at 4:10 PM

    If one wants to let the TAS know of a pending 906 settlemnt, what is the best apporach?

    I owe net-net no tax but the IRS want's over $1 million in penalites. The agent claims FAQ 9 does not apply as about $4k of tax is owed cumulatively from some other years (less than .25% of the AGI from those years); the agent further claims FAQ 35 is not available (even though the agent agrees actions were non-willful). The agent claims his "hands are tied".

  21. To Aggrieved-Taxpayer.

    Here is the route in...,,id=212313,00.html

    My dealings with them have been GREAT. They will give you a fair hearing, and really work on your behalf, if it is appropriate. They are especially helpful in the non willful instances and if FAQ 35 is being denied you.

    Here is additional information I have found for you..

    How do I reach a taxpayer advocate ?

    Call the telephone number listed in the brochure for the TAS office nearest you;

    Call the TAS toll-free phone number, 1-877-777-4778;

    File Form 911, Application for Taxpayer Assistance Order, with the ASe; or
    Request that an IRS employee complete a Form 911 on your behalf (in person or over the phone).

    Form 911 is available by phone at 1-800-829-3676, or on the IRS Internet web page at Fax or mail this form to one of the TAS offices.

    Address and phone numbers may change over time, but the most current information is always available on the TAS home page of the IRS internet web site. Fax numbers are also listed.
    Correspondence should be sent to the TAX

    What can I expect from the taxpayer advocate ?

    Your assigned case advocate will:
    listen to your point of view
    work with you to address your concerns, and
    see your case through to an appropriate conclusion.
    You can expect your case advocate to give you:
    His or her name, phone number, and badge number;
    Courteous and confidential service;
    Timely acknowledgment;
    An impartial and independent review of your problem;
    Time frames for action;
    Updates on progress; and
    Advice on how to prevent future federal tax problems.

    What information should I provide to the taxpayer advocate ?
    address, and
    social security number, or
    employer identification number
    Your phone number and best times to call
    The type of tax return
    tax year(s) involved
    A description of your problem or hardship
    how you previously tried to resolve the problem, and
    the office(s) you contacted if you know them.
    If you want to authorize another person to discuss or receive information about your case, send Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization. You can get these forms at most local IRS offices, at the IRS web site,, or by calling 1-800-829-3676

  22. Somebody suggested bringing it to Congress's attention. Well, Obama won't listen, doesn't care. He knowns it's a witch hunt unworthy of a civilized country, but he's a desparate pres. who will do anything to get out of debt -- even on the backs of grandmothers and grandfathers. A despotic abuse of authority. Fear mongering. Call it what you will, but this is more the working of the KGB. Republicans should use this opportunity to calm the outraged U.S. citizens, that if they are elected they will restore the good relationship with their offshore citizens.


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