Saturday, September 10, 2011

Opting Out Considerations - A Jeff Neiman Guest Blog (9/10/11)

The OVDP and OVDI programs have come to an end and many taxpayers who participated in the programs are about to get their tax bill from Uncle Sam. In the programs, the formula to calculate tax and penalties was rigid and inflexible. The programs dictated that penalties are the same for the taxpayer who knew of his reporting obligations and the taxpayer who innocently was not in compliance. As I described in more detail in a Tax Notes opinion piece entitled, “Jeffrey A. Neiman, Opting Out: The Solution for The Non-Willful OVDI Taxpayer," Tax Notes 11135 (9/23/11), here, the failure to differentiate between the two distinct taxpayers has prevented thousands of taxpayers from coming forward as they view the programs as too expensive.

As we turn the corner, taxpayers who entered the program and who were not aware of their obligation to file an FBAR or to report their worldwide need to consider opting out of the voluntary disclosure program. Under the program, the IRS and DOJ assumed every taxpayer acted intentionally or willfully. However, in fact, I think in many cases, it will be very difficult for the government to prove that a taxpayer willfully violated the law.

Willfulness is defined as the intentional violation of a known legal duty. It is the cornerstone to any criminal prosecution, to the civil fraud penalty, and to the draconian 50% per year FBAR penalty. The government proves willfulness by looking at a taxpayers conduct. When I was a federal prosecutor, examples of conduct I looked to in order to infer willful behavior included using nominees, misleading the IRS, providing incomplete information to an accountant, dealing in cash, and maintaining a double set of books. Without some of these factors, it is very difficult to prove willfulness and without willfulness, there is no criminal case, no civil fraud penalty, and no 50% FBAR penalty.

So what does the non-willful taxpayer do in order to possibly reduce his penalties? Consider opting out. On June 1, 2011, the IRS announced certain procedures for taxpayers who wish to opt out of the offshore voluntary disclosure program. The guidance makes clear that opting out comes with a price. Once the decision is made to opt out, it cannot be undone. All potential civil penalties are on the table and so is a full audit. However, the IRS has said that it will not refer a case for criminal prosecution because the taxpayer opted out of the program so long as the taxpayer was honest and truthful in their program submissions.

I also think there is an important distinction to be made between proving that a taxpayer willfully failed to report income and that a taxpayer willfully failed to file an FBAR. The FBAR was a form few practitioners heard of pre-UBS. To prove a taxpayer’s knowledge of the FBAR and his obligation to file the form will not be an easy task for the government as few accountants told their clients of their FBAR obligation. Additionally, the FBAR is a penalty that arises out of Title 31 of the United States Code and not Title 26 (Internal Revenue Code). As a Title 31 penalty, the IRS can assess the penalty but it cannot collect it under the Internal Revenue Code with lies and levies and other IRS collection tools. Instead, the IRS is treated just like any other creditor. To collect the FBAR penalty, the IRS must make a referral to DOJ’s Tax Division, which then must seek a judgment in US district court against the taxpayer. Once in court, the taxpayer may assert a lack of willfulness as a defense and have his day in court.

The design of the offshore voluntary programs have provided little relief for the non-willful taxpayer. Therefore, the only option may be to consider opting out of the program. The decision to opt out should only be done after consulting with an attorney who can assess the pros and cons of opting out and after assessing the likelihood of success in demonstrating the conduct was not willful.
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Guest blogger Jeff Neiman is currently a practitioner representing clients individuals and corporations and other entities in criminal tax, money laundering, racketeering, healthcare fraud, securities fraud, and other white-collar criminal cases in court and before law enforcement and regulatory agencies. Jeff was formerly a principal prosecutor in the UBS proceedings in the Southern District of Florida that essentially started the current round of Government initiatives involving foreign financial accounts. Those proceedings included a deferred prosecution agreement for UBS and a John Doe summons. Comments may be made to this blog and, if desired, specific comments may be made directly to Jeff via his email His web site with contact information is


  1. Thanks Jeff,

    These are valuable comments and perspectives.

    I am sure that many Minnows will appreciate this information about the Opt Out possibilities now that the OVDI is closed. I hope the fear and intimidation implied from the FAQs will not keep non willful OVDI participants locked into these harsh penalties for fear of how they will be treated outside the program.

    It is interesting that it took the IRS 20 months to come up with an Opt Out program, after the closure of the OVDP in Oct 15th of 2009.

    Do you have any insight as to why that is so?

    Also, I have to wonder, given your back ground and life at the Justice Department, and I assume a close working relationship with the IRS, do you have any additional insights on the original design of the IRS's OVDP and now the OVDI. Was the target ever intended to be the non willful small fry?

    Did the IRS ever give any thought or have any idea on how negatively this program would impact so many non willful, or benignly negligent immigrant and Expat tax payers? In the IRS and Justice Department efforts to shake lose the UBS clients, did they ever think, what is the unintended consequences of our Voluntary Disclosure program(s)?

    I think the 20 months it took to create the Opt Out says, the answer is NO, but then maybe I am wrong.

    Just curious.

  2. I wish I had insight in the way the OVDI and OVDP were enacted. These were IRS programs that piggybacked upon the publicity we had generated with the criminal investigation.

    I think we have seen the IRS try to give the non willful taxpayer some relief by issuing the opt out guidance and by lowering the penalty for non-US residents without US sourced income who are tax compliant in their home country. We are stuck with the programs as they were announced. Opting out may be the only way the non willful taxpayer will be treated fairly.

  3. Jeff,

    I can not speak for all those who are now in OVDI, but in my case, it was not out of fear of criminal prosecution for me. I had never tried to hide offshore money, no entity, no false address -- I thought it was enough after tax were paid, and had the money offshore rather openly.

    Once learning the tax non-comliance problem (after reading the OVDI news), and I thought it was the right thing to make it clean.

    OVDI (one size fits all) seems a rough justice for some, and especially for expat US citizen and poorly informed immigrants.

    I don't see public sympathy for us -- the country has over spending problem, so do a lot americans. We have money offshore -- that makes us like evil -:)

  4. Thanks Jeff, for your comeback comment. very much appreciated.

    I hope this Opt Out works for the new OVDI participants. Too bad it took 20 months for the Opt Out to finally become a policy. It should be a front end filter that the IRS uses to move the minor offenders out of the OVDI process, so they can get to work on the real target Whales.

    They have wasted a lot of resources in the OVDP, and caused a lot of grief needlessly, in my opinion, by not recognizing from the "get go" that all were not the "Willful" cheats.

    Maybe that is finally changing, but the evidence will only come from the Opt Out results. I hope Practitioners will share these outcomes for the anxious OVDI participants on Jack's blog. I am sure that no stats or analysis will be forth coming from the IRS.

  5. Something important for people considering opt out is the possibility of a full audit. If so, what years would be audited ? Can the extension to assess penalties filed under the OVDI be revoked ?

  6. To Anonymous @ September 12, 2011 6:03 AM

    You ask about what years will be audited. I address below the statute of limitations as to which years can result in a bill being sent to the taxpayer who opts out. These are commonly referred to as "open years." The years that are not open years are commonly referred to as "closed years." Although the closed years may not be adjusted, in theory at least, the IRS can audit them to determine whether or not they are really closed, particularly on the income tax side, or can audit them for continuity to determine the adjustments in the open year.

    1. Income tax years. The general statute of limitations is three years. There are two key exceptions -- 6 years for a 25% omission from gross income and unlimited statute if fraud is involved. I set aside and do not discuss fraud further because that is an open statute of limitations and consents to extend the statute of limitations are irrelevant. Setting aside fraud, the Form 872 consents can affect only the years that are open at the time the IRS delegate signs the consent form. Generally, that would mean that the IRS can adjust only those years that were open at the time the consent form was signed (either three years prior thereto or, if applicable, six years prior thereto). (The Form 872 the IRS requires includes all years since 2003, but legally it will apply only to years otherwise open at the time the IRS signs the form.)

    2. The FBAR Consents. The statute of limitations for FBAR civil penalties is 6 years. The rules for the effect of such consents are not spelled out. Indeed, prior to these programs, I am not sure that the form even existed. However, statutes of limitations generally can be extended or even waived. So, I am uncertain as to the precise effect of the FBAR consent. I suspect that, at a minimum, it would keep the statute open for the years that are open at the time the IRS signs the consent. Note that the FBAR consent only covers 2004 and 2005 -- specifically it excludes 2003 which, inside the program, is covered by the in lieu of penalty calculation but outside the program is now a closed year.

    Finally, just for emphasis, the consents are only meaningful to those who opt out. Inside the program, the settlement offered covering years from 2003 forward is a settlement regardless of the statute of limitations.

  7. Jack

    Thanks, your comments about the impact of signing the OVDI consent on the SoL. Extremely helpful.


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