Monday, August 15, 2011

Tax Notes Article on Practitioner Assessment of Offshore Initiatives (8/15/11)

Tax Notes has published an article, Marie Sapirie, Practitioners Assess Offshore Initiative as Deadline Approaches, 132 Tax Notes 664 (Aug. 15, 2011). With permission of Tax Analysts, I make it available to readers here.

The article is short and worth reading in its entirety. Some excerpts:

"The second voluntary initiative gives people a fair way to resolve their tax problems," IRS Commissioner Douglas Shulman said August 8 in a reminder that the 2011 OVDI is ending.

Not all practitioners agree. The standardized penalty structure of the OVDP and OVDI "has led to some incredibly disproportionate and painful results," said Michel.

* * * *

The program's inability to differentiate between taxpayers' conduct and their culpability is frustrating, said Jeffrey A. Neiman, who led the prosecution of Swiss bank UBS as an assistant U.S. attorney in the Southern District of Florida. "If the OVDI program were more fair for these taxpayers who were not acting willfully, you would not have an issue with quiet disclosures or opting out, and you would probably have more compliance as well," he said.

* * * *

James N. Mastracchio, a partner and chair of the tax controversy practice at Baker & Hostetler LLP, said that although the opt-out procedure was still in its early stages, he has talked with agents about the facts of his clients' cases in an attempt to reach an agreement. Sometimes the agents even interviewed taxpayers who wanted to opt out, he said, adding that approach has helped to remove some of the uncertainty from the process.

Mastracchio said that in opt-out cases in which taxpayers have been able to reach agreements with the agents as to what the settlement amount should be outside the OVDP, the process has been smooth. He said it starts with a letter from the taxpayer with a proposed settlement. If the agent agrees with the assessment, the agent writes a recommendation, and the file goes up for review.

"Those cases have been returned quickly to the agent, and we've been able to resolve those cases," Mastracchio said. However, when there is a disagreement over what the taxpayer and the agent consider an appropriate settlement, the process has stalled, he said.


  1. Does Mr. Mastracchio's comment indicate that there is a possibility that one could get an idea of penalties that might be assessed after opt out irrespective BEFORE taking that irrevocable step ? That would certainly be a help for people deciding whether to opt out.

    Jack, do you have any idea how important a data point the IRS considers a wrong Schedule B answer to the foreign account question in deciding whether to accept reasonable cause, deciding willful vs. non willful etc.

  2. I kind of draw the same conclusions that I have had all along.

    1. Its a good thing to become compliant and a good thing IRS implemented formal mechanisms to do so although at a high cost.

    2. For most the prudent thing to do is to join the program and budget for the big penalties while arguing for any mitigation as per the guidelines.

    3. For the fortunate few and those with very good facts and circumstances coupled with sound legal advice, opt out or quiet disclosure may be a viable alternative although it may have risks involved.

    4. For those who do nothing and remain undisclosed the future will be very uncertain and risk of discovery is increasing.


  3. Does the IRS ever read these Tax notes, or take any notice of what the Practitioner community says or recommends? It seems to me that it has little impact, but I could be wrong... I am reminded of this from 2009, and did the IRS take notice?? I think not... Please tell me I am wrong..

  4. "Mastracchio said that in opt-out cases in which taxpayers have been able to reach agreements with the agents as to what the settlement amount should be outside the OVDP, the process has been smooth."
    Any insight into what's turning out to be acceptable amount in non-wilful cases? are ther any memos that IRS agents are following? Are the "usual practices" of the past still valid, or different benchmarks altogether??

  5. Jack

    I really need your advice for my OVDI application

    I opened an account to take home loan in 2005 and paid the mortgage by transferring funds from the US to Indian bank account...I never rented the home and it produced no income

    Do I need to include the FMV of the home in penalty calculation? Will the IRS consider my funds used to pay mortgage "tainted" as they were in an unreported bank account.

    thanks so much

  6. To Anonoymous August 22, 2011 4:11 PM

    I assume your "home" is in a foreign country. You would include the penalty base only if it is in some way U.S. tax noncompliant. Thus, had you rented it (you say you did not) and not reported the rental gross income, it would be U.S. tax noncompliant. Also, it is U.S. tax noncompliant if funds from the Indian bank account were U.S. tax noncompliant and were paid against the home in some way (including paying down the mortgage).

    It would be best to engage counsel on this matter before you take any action on the basis of the above.


    Jack Townsend

  7. Jack,

    Thanks for your response. How can I get counsel? I am working with a CPA and he is not sure!

  8. To Anonymous August 22, 2011 6:15 PM

    I am not sure precisely which email your post relates to but taking the question on face, you can get counsel by engaging one. I recommend that you ask the accountant who may know attorneys, in your geographical area, who can represent you. Alternatively, you can email me with your geographical area and I will try to identify one or more counsel in the area who practice in the OVDI context.


    Jack Townsend


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