1. Voluntary disclosure for offshore accounts is still alive and well even after the close of OVDI 2011. In theory, the voluntary disclosure will be under the noisy disclosure procedures for general voluntary disclosure and there is uncertainty as to the amount of the "in lieu of" penalty.
2. The authors state:
Admirably, CI used a pre-clearance process in the OVDI programs, and one would think that would remain available. Will "optional intake letters" continue to be required? And how does the process differ for non-foreign-account cases?JAT Comment: I suspect that the IRS will use the administrative process it has refined (original letter by the preclearance letter, a submission like the offshore voluntary disclosure letter and a package like the one required in the program. This will insure some level of uniformity and consistency for fair treatment relative to those who came forward to join the programs.
3. The authors state:
What civil penalties will be imposed? One would think that the IRS will seek to exact an amount somewhere north of 25 percent for offshore cases, and probably less than the 50 percent paid by most of those who pleaded guilty to criminal tax offenses.Presumably, whatever that amount is it will function like the program "in lieu of" penalty to resolve the other penalties that could apply (5471, 3520, etc.).
4. In this regard, the authors ask:
Can a taxpayer still make the type of voluntary disclosure contemplated by Internal Revenue Manual section 18.104.22.168(6) -- that is, the submission of amended returns with a cover letter (by an attorney) offering to pay penalties? Will that submission be deemed the same and treated the same as a pre-clearance request?JAT comment: I project that the answer would be no.
5. In this regard, the authors do note for U.S. taxpayers with material criminal prosecution risk:
in a case with serious potential for criminal prosecution, a noisy disclosure is probably essential. The IRS obviously still prefers a noisy disclosure through CI, and in light of express guidance over the past three years, when any case has facts that would likely give rise to a criminal referral, this may be the only sensible approach. Indeed, for clients of any bank that has been in the news, one would think that given the publicity over ongoing settlement negotiations with Swiss banks, time is of the essence to submit a pre-clearance [some type of noisy] request.6. As to others (i.e., those without material risk, the authors note that they can do a noisy disclosure but:
For some clients in this category, however, the increased risk of detection is a high price to pay for what they see as largely foot faults. For this group the "compliance from now on" option will be far more attractive, especially if little U.S. tax is owed or the client lives outside the United States. This is a perfectly viable option for many noncompliant taxpayers, and obviously, at least upfront, far less expensive. The only difference for much of this group between compliance going forward and quiet retrospective filings is that someone who simply starts filing and then get audited cannot argue that she acted in good faith to address prior-year noncompliance.7. And, as to those in the middle:
the practitioner has no choice but to explain to the client the risks and benefits of each possible approach and work through the choices with the client. In a case involving an account of any material size, we doubt whether a truly quiet disclosure can be made. The IRS is likely better able to scrutinize amended income tax returns in service center processing or, perhaps more important, delinquent (or even first-year-filed) FBARs sent to Detroit with the required explanatory statement describing the reasons for the late or amended filing. Indeed, one would think it sound tax enforcement policy to design a system to capture those filings for further review, and that may be occurring. We see the opportunity for a true quiet disclosure greatly diminished in any situation involving the disclosure of any substantial foreign account. In those cases, the primary difference between the noisy and quiet disclosures from the past -- the likelihood of audit or civil penalties -- is not as stark as it once was.
Otherwise, the issue is whether the IRS would react with anger or hostility to a quiet disclosure if the returns or FBARs get pulled for audit. During both OVDI programs, the IRS expressed disdain for quiet disclosures, threatening to detect and even prosecute persons who attempted quiet disclosures during both initiatives. We have heard of anecdotal instances of IRS agents stating as much, and we are aware of a few cases in which quiet disclosures have been detected and opened for examination. In the criminal information filed in a recent case that resulted in a guilty plea, the IRS made plain that quiet disclosures were not considered true voluntary disclosures, although in that very unusual case the quiet disclosure failed to report all accounts.