Tuesday, September 20, 2011

Voluntary Disclosures of Foreign Financial Account and Related Matters After OVDI 2011 (9/20/11)

The IRS has posted contact information for persons desiring to make noisy voluntary disclosures. See Voluntary Disclosure Contacts in IRS Criminal Investigation, here. The notice states:
Tax professionals or individuals who want to make a voluntary disclosure not covered by the 2011 Offshore Voluntary Disclosure Initiative, may contact an IRS criminal investigator at the numbers below.
I speculate that

1. As in the two programs (OVDP 2009 and OVDI 2011) the IRS will discourage quiet disclosures of foreign financial institution accounts.  Will the IRS and DOJ Tax will pick off one or two or more where the quiet is not quite up to snuff and prosecute?  (I can't define the up to snuff standard; it is like pornography -- you will know it when you see it and good practitioners will prevent their clients from submitting not up to snuff quiet disclosures.)

2. Taxpayers making the disclosures will be required to produce the types of packages required under the formal programs, in essence doing all the work for the IRS.

3. The amount of the civil penalties will be higher than in OVDI 2011, although it is uncertain whether that will be achieved by an informal program rate (take it or leave it and go through audit) or on a case by case basis through an audit.


  1. Now that the IRS has all the infrastructure in place (process, computers, trained people) to handle foreign account VDs, it wouldn't be at all surprising if it used the same framework (initial letter etc.).

    I wouldn't be at all surprised if many QDs are also asked to join this process (excluding obvious cases such as expats with little to no tax due), even if the QD is complete (which essentially eliminates the possibility of criminal prosecution), but not some civil penalties.

    I have heard 2 CPAs say that they were doing traditional VDs with foreign account issues even through the OVDI phase, but I have my doubts.

  2. Jack--

    The IRS has, in my view, boxed itself into a corner with respect to post-OVDI offshore bank account cases. If taxpayers participate in the voluntary disclosure program going forward, IRS can either use a ratcheted up cookie cutter penalty approach or apply a genuine "facts and circumstances" approach. Either approach creates difficulties for IRS in light of how they handled the OVDI cases.

    If they apply facts and circumstances accross the board, you wlll eventually see a group of taxpayers who are treated more favorably by the IRS than many of the taxpayers who participated in OVDI but who had low (or no realistic) criminal exposure. [That describes the majority of our OVDI clients.]This will breed resentment by many of those who participated in OVDI.

    The harder the line taken by the IRS in these future cases, the greater the chances that there will be reported court decisions that are unfavorable to the IRS. If the IRS takes a harder line, and loses some key cases, a majority of OVDI participants and a majority of post-OVDI participants will be unhappy, for different reasons. OVDI participants will be unhappy because they will see post-OVDI participants getting better treatment financially (albeit after having to go through litigation). Post-OVDI participants will be unhappy with the hard line taken by IRS, even though the IRS was supposed to apply "facts and circumstances." There will probably be significant institutional pressure within the IRS to treat the post-OVDI participants less favorably than the participants in the previous "cookie cutter" penalty regimes.

    And if the IRS does not take a hard line in its "facts and circumstances" approach to post-OVDI participants, most OVDI participants will be unhappy.

    If the IRS ratchets up the penalties for a cookie cutter approach (with an opt out into facts and circumstances), most of those who participate will do so very unhappily.

    Those taxpayers with civil exposure but no significant criminal exposure will not do voluntary disclosures. Their approaches will be all over the map, depending on their unique facts. If they get targeted by IRS civilly, IRS will be criticized no matter how the IRS treats them, for reasons discussed above.

    Bottom line is that the IRS has created a situation where the "true crooks" who participate in the voluntary disclosure program and those who the IRS never focuses on will have reason to be happy. Everyone else will be dissatisfied to some degree. Which is really bad for the system.

    I'm betting that the IRS will not formally use another "cookie cutter" approach but will purport to use a "facts and circumstances" test while having "informal" guidelines that will become de facto rules, even in Appeals.

  3. To Anonymous @ September 20, 2011 11:26 AM

    Excellent analysis.


    Jack Townsend

  4. I cannot believe that a high net worth individual would call an IRS Criminal Investigator to turn himself in.

    This is akin to a high-ranking terrorist General calling the FBI to confess.

    If they had a change of heart they would start acting right from now on (paying all taxes and living peacefully), not rehash old matters.

    Because if we bring up old matters, the IRS is even more guilty than the individual, would be the argument.

    Unless there was an amnesty program, then they might have an incentive. I suspect this OVDP/I was sold as an amnesty program, then switched to a tax because amnesty was not bringing in enough money. (IRS employees have to eat too.)

    I believe most tax professionals, and even the IRS employees assumed amnesty, only to have the rules changed after only Minnows entered the program. Not enough Whales meant not enough tax revenue, so they had to tax the poor Minnows instead.

  5. To Anonymous @ September 20, 2011 11:26 AM

    As Jack said, excellent analysis, although when he says that, it means something. :)

    Some unformed thoughts like that had been knocking around in my head, but wasn't able to verbalize them in such a concise manner.

    Phil Hodgen had said to me more than a year ago, this program is turning out to be a
    "Great Deal for the Crooks, and everyone else is getting screwed" He is direct! :)

    A Question for you. I take it you are an attorney...right?

    Of your client basis, what would you say your Minnow to Whale ratio is?

    IE, how many represent the intended target of the program when this OVDP started piggy backed on the Justice Department publicity surrounding the 4500 UBS names they were trying to shake loose.

    And how many represent the others, like me, where the light came on as we were hit alongside the head with the “2 by 4 of realization” that we had a compliance issue that need cleaning up. We tried to do the right thing by disclosing, with the severe penalty results that came from that. Never ever considered ourselves the program target, nor did our Examiner who thought we shouldn’t have even been in the program in the first place.

    I have a Bloomberg reporter who has taken an interest in the "unintended Consequence" angle of this story that I have been pitching him, so just looking for some indications Practitioners that are processing many OVDPs and OVDIs. Inquiring minds want to know.

    Just a percentages is fine, or actual numbers of Whales and Minnows if you can. Whatever works for you, and whatever you feel comfortable revealing.

    Thank you much. I am on a mission these days to shed some light somewhere! I might fail, but I am going to keep trying for a while longer.

    and M,

    I have been encouraging the Reporter I am talking to, to ask that very question about the Revenues. How much of the $2.7B comes from the Minnows and how much from the Whales?

    And, of the total, how much is actual back taxes collected, and how much of that is the penalty oil that was squeezed from everyone.

    That is what I want to know, and then $2.7 billion begins to mean something.

  6. To Just Me, below is a quote from Jeff Neiman Attorney web site blog.
    It might put in prespective some of the statistic if it is accurate.

    "However, it is believed that there are still millions of unreported foreign accounts held by American taxpayers. Also, according to the numbers, the average account value per disclosure was $90,000. This seems remarkably low. The program was not designed in order to achieve maximum compliance"

    Please keep up with the important mission getting the Bloomberg reporter involved.

  7. Just Me - First of all in a true american way (which this OVDI program is not!) you are trying to stand up for others - I gather you have no incentive to do so since you already closed with a 906 - my sincere thanks for getting this issue to the notice of reporters.

    Another things to point to reporters is the plight of immigrants - I know through blog postings on another Indian site that there so many people in the program who are temporary visa holders (no green card no US citizenship) and have to fork out their hard earned wealth. In some cases these people have been here for 3 or 4 years....there was one blogger who even contemplated being on the run as he had no liquidity to pay the dues to the IRS - unlike the whales with swiss bank accounts who were flush with cash!

  8. So what numbers would you use to differentiate a whale
    and a minnow?
    How would you categorize an immigrant who has legacy assets left which were sold and tax compliant?

  9. "How would you categorize an immigrant who has legacy assets left which were sold and tax compliant?"
    to be clear

    i meant tax compliant in the home country.

    For eg i had an asset in india which was purchased from income earned in India and tax compliant in India.
    This asset was sold and the gain reported in India but not in the US.

  10. To Anonymous September 21, 2011 11:08 AM

    No incentive at all. I wished there was one to repay me for the lost LCUs I have expended. :)

    The frustration of all this just built up for two years, and now that I am done with the process, I can't let go of the injustice of it all without an attempt to get some light shinned on it.

    So I all I am doing is releasing of a little built up tension, in what I hope will be productive for others following me down this torturous trail. Once or twice in your life, you decide to try a little activism for a change. I am a realist, however, recognizing that it all may come to nothing.

    The plight of immigrants is very much in my mind. Everything I am writing to Reporters focuses on two communities. Expat and Immigrants. That dual population was in my first letter to Shulman, back in October of 2009. This is not just because I am an altruist. It is an issue close to my heart. My wife, is a 33 year Green Card carrier. When she left her home, and came to the US, they never asserted upon her what America asserts on its Citizens/ US persons. She still struggles to understand all the IRS regulations that left us in a non compliant state due to our inattention. To her simple way of looking at things, what is there is there, and what is here is here, and you pay the taxes involved in both places. Only if you expatriate the money do you have a tax liability to the country of your residency. I keep telling why, as I understand it, that only applies to Corporations profits. They are special cases, as they are “people” when it comes to free speech, but “special entities” when it comes to taxes. When she tries to argue about the logic of what she thinks should be, I reminder, that taxation has noting to do with logic. It is what it is. It is all about what they can do, and as we have learned, than can do what ever they darn well please, given the Statutes that our wonderful Congress (both D and R) enacts. We have gotten a hellva education from all this, although it has no productive value.

    I do think the IRS has been very short sighted, and very heavy handed in the way it has gone about trying to extract additional revenues from a lot of people who would have become compliance if different strategies were employed. However, the IRS will never recognize the loss, as the customers (taxpayers) disappear, or “take a runner”, instead of becoming compliant with a process that has such a high cost in time, stress and money. Stupid, Stupid, Stupid policy.

  11. To September 21, 2011 12:04 PM

    How to differentiate a Minnow and a Whale..?
    Well, this is just my construct that I came up with when I first wrote Shulman, trying to get him to see the errors of his program. I am not trying to put too fine a detail on it. I don't think like the IRS. IE, $1 dollar more than some arbitrary amount, and you are a Whale!

    I just discussed the issue a little bit more here... Maybe you can decide where you fit.

    Look for September 21, 2011 9:35 AM

    As for your specific legacy question, it centers around intention. If you were actively looking to evade taxes with some tax avoidance scheme like those UBS was marketing to the US Rich here in America, then you are probably a Whale. In the case you site, I would probably have classified you in the Minnow by-catch category, and would have treated you as such. If I were the IRS god,(given the little information you have provided), I would have got your paperwork off my desk as quickly as I could. I would have had you just amend your taxes, like Geithner, and send you off with a letter to "Be compliant whence forth my son. Go and sin no more." I would not have wasted one more minute of valuable government resources trying to squeeze some more oil out of you using an FBAR as the justification for addition extraction!

    It is obvious, I would not make a good IRS Examiner. :)

  12. This is from the Wall Street Journal on Aug 19.

    To Just Me, could you please email these reporters your information package.


    A wave of people with undeclared accounts has emerged before an Aug. 31 deadline to enter a special amnesty program at the Internal Revenue Service. Many watched and waited in the wings as thousands came forward in 2009 under an earlier penalty deal. The IRS has cracked down hard on the use of secret accounts in Switzerland and elsewhere to evade taxes.

    Robert E. McKenzie, an attorney in the Chicago firm Arnstein & Lehr LLP, said he fielded seven calls on Tuesday from taxpayers asking about the IRS program. One was an American citizen who has lived and worked abroad for 20 years without filing U.S. tax returns or an IRS foreign account form. Several others were Indian immigrants here on H-1 visas, and another was an Iranian immigrant.

    The bottom line, according to McKenzie and other advisers: the IRS publicity campaign is reaching a lot of people who have not been following the rules. This week, the agency reminded taxpayers of the Aug. 31 deadline.

    U.S. government activity in recent days is partly behind the new surge of worry by people who, after all, stayed unnerved until now, according to Scott Michel, a partner at law firm Caplin & Drysdale in Washington, D.C. The Justice Department last month told Credit Suisse (CS) it was investigating its cross-border private banking services to U.S. clients. It also indicted several Swiss senior private bankers for helping hide money in Swiss banks. And, federal prosecutors indicted two independent financial advisers on similar charges.

    Credit Suisse said last month is it responding to requests for information by the Justice Department. It had no further comment for this article.

    The IRS didn’t immediately comment.

    Tax advisers expect they will have added time to gather key documents for clients who make it into the program by Aug. 31. The agency said in June it might extend the deadline for some taxpayers by as much as 90 days. It offered a way for people to get out of the program, which some tax advisers have criticized as poorly run. And, it said it would remove some uncooperative taxpayers.

    Advisers have called the amnesty program ill-run. Cases have bounced from one agent to another around the country, causing confusion. The IRS does not seem to see the difference between tax evaders with big, complex accounts and others such as heirs of Holocaust survivors who kept accounts secret out of ignorance of fear.

    A taxpayer whose account the IRS finds before it is disclosed faces a possible criminal charge of tax evasion, which can result in a prison term of up to five years and a fine of up to $250,000. Filing a false return carries a prison term of up to three years and a fine of up to $250,000.

    The top penalty in the 2011 amnesty program, which applies to accounts in 2003 through 2010, is set at 25%, in contrast to 20% under the first program. There is also a new 12.5% penalty for smaller offshore accounts — those with balances that didn’t go over $75,000 for the years that apply.

    For the lucky few, a very low 5% penalty may even apply in some cases.


  13. M…..

    Thanks for those, and yes I will. Really appreciate you sending them along. All I am doing is emailing these days. LOL If you have the actual article link, and it is not behind a pay wall, I would appreciate it. Or just the article title and I will search for it. Thanks.

    I just finished sending an email to my favorite news discussion program, To the Point, by Warren Olney. He has one of the best narrated and balanced shows anywhere on radio. Bar none. Of course that means he is NOT on the AM dial.

    You really get to hear all sides of an issue, in a civil way with out partisan rancor. If you like partisan rancor, then this may not be for you. He has expressed interest in this issue in the past, so will try again.

    And, if you are tired of Cable shout fests, or AM blather with all the commercials, you might try him out. Yes this is a blatant plug, but since it is a non profit PRI program, I have no conflict of interest. :)


    btw, if you are interested...and I know you are...

    I have one bit of new News for you.
    This was from KUOW, the NPR station up in Seattle.

    Click on one of the streaming Icons for "Listen to Weekday" section. I used the Real Audio one.


    The discussion was with a Canadian Reporter, Vaughn Palmer, on the dilemma US citizens in Canada are feeling up from the IRS tax evasion crack down.

    It ran for 9 minutes at the beginning of the program.

    This is the first on air discussion I have ever heard on these VD issues and the unintended consequences the IRS efforts.

    Vaughn actually did a pretty good job summing up the issues in a way an average person could understand. There needs to be more coverage like this.

    This discussion centered around these two pieces which have run recently in the Globe and Mail

    http://bit.ly/rg8S15 and this http://bit.ly/o3ChAA

    btw, if anyone else reading this, has a good reporter email address, and you think they might have an interest in the story, I will be happy to take it and try!

  14. http://www.vancouversun.com/news/Americans+living+Canada+risk+facing+massive+penalties/5275424/story.html

    It’s hard to get a count of how many Americans live in B.C. or in Canada, but the consensus is that the number is big. Published estimates range from 600,000-plus to a million or more nationwide

    Even more chilling, he said, Canadian-born children of American citizens may not realize they may automatically get U.S. citizenship without ever making any effort to apply for or acknowledge it. So some may be at risk of penalties without even realizing they’re dual citizens.

    Several Americans who have suddenly realized they are not in compliance declined to be interviewed for this story.


    The IRS did not comply with The Sun’s request for an interview, and it did not send, as its spokesman promised, background information on the issue.

  15. To Just Me,

    You can try also the Canadian reporter on the following web site;


    or you can even try contact directly the Canadian Finance Minister who blasted the IRS on this issue:


    Maybe our northern neighbor will help bringing some common sense to Congress and Administration.

  16. http://online.wsj.com/article/SB10001424053111903374004576583230001583382.html

    Offshore Banks Subject of Grand Jury Probes

    The information about the grand jury probes was mistakenly published on the Justice Department's website, where it remained unnoticed for months until Tuesday, a person familiar with the matter said. The department generally doesn't make public information about grand jury probes.

    After receiving phone calls from reporters, the department removed the information from its Tax Division website. But it remained available from saved versions of the site. It wasn't clear which entities were involved in the grand jury probes.

    Charles Miller, a Justice Department spokesman, declined to comment.

  17. http://blogs.wsj.com/financial-adviser/2011/08/19/secret-swiss-account-holders-say-game-over/

    Secret Swiss Account Holders Say Game Over

  18. Thnx M.

    Emails sent last night.

    BTW, borrowing from a comment on Phil's blog, see below: Informal polls are not statically proof of anything, yet do give indications. So, the IRS shot gun approach to compliance, still isn't showing the compliance success amongst the Jaywalkers, if the 6% of poll participants is a guide. And those that get in, are going to have less than a joyful experience, is my opinion. I was amazed at how many people actually participated in the poll. Almost 2,000. Then I remember how many Americans are reported to be in Canada. Now where are those other 598,000? All compliant? or just not reading the newspapers?

    Here it is...
    Concerned Canadian
    September 23, 2011 | 6:02 am

    Globe & Mail Toronto newspaper ran on-line poll to follow up on Wente’s article. Questions and results:

    “If you are an American citizen living in Canada, how are you planning to deal with the IRS cross-border tax crackdown?:

    * I applied for the limited-time amnesty: 6% (136 votes)

    * I am still working out a plan with a financial professional: 8% (160 votes)

    * I am not sure what my options are: 22%
    (456 votes)

    * Nothing, how will they find me?: 65% (1368 votes)


    And to Anonymous…..September 22, 2011 6:19 PM

    Thanks for those links, and I have seen them and plenty more. The story is getting wide coverage up north, but it is here in America where it doesn't break radar coverage. If you have reporter emails for US media, that would be great, as that is where I am focusing my efforts. I doubt I could add anything to Canada dialog, as at this stage it appears to have momentum on its own.

    Thanks for your effort and interest.

  19. Front Page article regarding the weakening of "willful":

    Under English common law principles, most U.S. criminal statutes traditionally required prosecutors not only to prove that defendants committed a bad act, but also that they also had bad intentions. In a theft, don't merely show that the accused took someone's property, but also show that he or she knew it belonged to someone else.

    Over time, lawmakers have devised a sliding scale for different crimes. For instance, a "willful" violation is among the toughest to prove.

    Requiring the government to prove a willful violation is "a big protection for all of us," says Andrew Weissmann, a New York attorney who for a time ran the Justice Department's criminal investigation of Enron Corp. Generally speaking in criminal law, he says, willful means "you have the specific intent to violate the law."

    A lower threshold, attorneys say, involves proving that someone "knowingly" violated the law. It can be easier to fall afoul of the law under these terms.


  20. Also:
    hundreds of thousands of Americans ... charged and convicted in recent decades under federal criminal laws—as opposed to state or local laws—as the federal justice system has dramatically expanded its authority and reach.

    As federal criminal statutes have ballooned, it has become increasingly easy for Americans to end up on the wrong side of the law. Many of the new federal laws also set a lower bar for conviction than in the past: Prosecutors don't necessarily need to show that the defendant had criminal intent.



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