Thursday, January 12, 2012

National Taxpayer Advocate Report Critical of IRS Implementation of Offshore Voluntary Disclosure Programs (1/12/12)

The National Taxpayer Advocate who has intervened for participants in OVDP and perhaps OVDI as well has issued her annual report to Congress.   The web page with links to components of the report is here.

Among the items discussed are the problems she and her staff perceive with respect to the IRS's implementation of the voluntary disclosure programs for offshore accounts.  Most of her specific angst appears directed to the IRS's "bait and switch" on OVDP 2009 FAQ 35.  Readers of this blog already know of the bait and switch and the NTA's disapproval.  See particularly Tax Notes Discusses Dispute Between the Taxpayer Advocate and the IRS About OVDP 2011 (1/6/12), here.

The NTA's comments in the report are contained in the International Issues section here.  The key portions of the International Issues section that I picked up on quick search are:

U.S. Taxpayers Abroad Face Challenges in Understanding How the IRS Will Apply Penalties to Taxpayers Who Are Reasonably Trying to Comply or Return into Compliance  (beginning on p. 191)

The Potential for Strict Application of FBAR and Other Penalties Causes Unnecessary Stress and Fear Among Benign Actors Who Made Honest Mistakes.(beginning on p. 195).

The IRS’s Offshore Voluntary Disclosure Program “Bait and Switch” May Undermine Trust for the IRS and Future Compliance Program (beginning on p. 206)
JAT Note:  This has a full discussion of the voluntary disclosure and bait and switch on OVDP 2011 FAQ 35 and the OVDI 2011 counterpart.  Here is the conclusion for this section on on p. 221.
The 2009 OVDP appears to have been a great deal for those engaged in criminal tax evasion.  They were not affected by the IRS's “clarification” that it would not consider nonwillfulness, reasonable cause, or the mitigation guidelines in applying the offshore penalty because their violations were willful and unlikely to qualify for mitigation.  However, the IRS Is perceived as having “reneged on” the terms of the 2009 OVDP that would benefit taxpayers whose violations were not willful.  Many felt that the IRS placed them in the unacceptable position of having to agree to pay amounts they did not owe or face the prospect the IRS would assert excessive civil and criminal penalties.  This perceived reversal burdened taxpayers, wasted resources, violated longstanding IRS policy, opened the IRS to potential legal challenges, and was not properly disclosed as required by FOIA.  it also damaged the IRS's credibility.  As a result, it is likely to have more difficulty gaining participation in any future settlement initiatives. 


  1. Here is an interesting perspective on this matter:

  2. Jack,

    You conclusion is right on point.

    I do hope Commissioner Shulman does the right thing, and affirms Nina's Directive (TAD) due on January 26th. She deserves a medal of valor for taking the issue on, against the grain of those in this Administration who have not understood the unintended consequences of how their program was constructed and administered.

    We shall see if he gets it. I fear not. What bubble does he live in?

    I don't think they have any idea of the damage they are doing to the US reputation in the Expat, Immigrant and non suspecting "US Person" spouse world.

    This US Expat in France is doing her best to understand it and communicate it. Not sure this was the message the IRS wanted spread around the world, or maybe they did. I just don't know. Either way, I find it troubling, and sadly I have joined that chorus to tell folks to avoid the "US Person" designation like a plague. Is that what they wanted?

  3. The report mentions at one point that the IRS said it did 2310 FBAR audits in 2010. That may include some audits under opt out (probably weren't many opt outs in 2010). I'm not sure if it includes audits under other parts of the BSA (such as audits of banks, finance companies) -- I don't think so. Nor do I know if it includes routine audits of people, some of whom had filed FBARs (i.e. the audits weren't specifically for FBARs, just a general audit which happened to include an FBAR).

    But in any case, the numbers are fairly small. This is significant for opt out -- if even 10-20% of OVD participants opt out, is the IRS really likely to waste its resources doing a full audit of people (both tax and FBAR) with small accounts given that this would require treble the number of FBAR audits it does normally ?

  4. The report says

    "In 2010, the government closed only 2,386 FBAR examinations, assessed less than $41 million in FBAR penalties, referred a negligible number (too few to list) to DOJ for collection, initiated only 21 criminal investigations, and convicted only 7 people for willful FBAR violations. IRS response to TAS information request (Sept. 14, 2011). By contrast,
    it issued 131 warning letters in lieu of penalties"

    All of this reinforces the idea that the IRS is really not going to conduct thousands of FBAR audits for minnows on opt out. I note that only a negligible number were referred to DoJ for collection (this may be because the taxpayer stuck a deal for a lower penalty, or it may just be a recognition that these are hard to collect). The total amount collected per audit = 41 million/2310 = around 20K per audit. And even that number is likely misleading, since a few big settlements with big time evaders could drive the mean up (the median would be a better indicator).

  5. To Anonymous Jan 27, 2012 03:02 PM

    I like your analysis.

    I think the conclusion is right -- the IRS probably does not have the resources to do standard audits for all the foreign account issues (income tax and FBAR).

    However, I would be cautious of this data set of information for the follow reasons:

    1. The information is for fye 2010, which was pretty early in the current initiatives (OVDP and before OVDI). I am not sure that, after post 2010 years are tallied, 2010 would be representative or a fair basis for projecting the results, particularly since the IRS will have refined its processing.

    2. Keep in mind that those who get to audits by opting out of the OVDP / OVDI civil penalty regimes will have done the bulk of the audit work for the IRS -- the submissions will cover most of what the IRS requires for a good audit. Of course, the factual nuances necessary to develop a good FBAR wilfulness or income tax civil fraud penalty case will not be developed, but the IRS may be able to do that work fairly efficiently with a combination of the data the taxpayer submits and the nuances it learns from processing a lot of these audits.

    3. It is true that, I suspect, most of the audits will settle. The IRS cannot pursue that many cases through the court system. So, in order to settle, the IRS will have to offer a deal sweet enough for the taxpayer to settle.

    4. The problem for unrepresented taxpayers is that they may not be able to recognize how far to press the IRS to make the deal one that is best for the taxpayer and the lowest the IRS will reasonably accept. I am not saying that representation by a tax professional and many IRS agents may offer as fair a deal as could be obtained with representation. I am just saying that it is a risk factor for the taxpayer. I would like to think -- hope -- that the IRS agent will offer as good a deal to the unrepresented as to the represented. But, since it may end up being a negotiation and fairness issue, perhaps the represented party will be better able to shape the discussions.

    I don't mean at all to detract from your analysis of the data. It is very good. Sort of like Moneyball for IRS voluntary disclosures. This data is very good. Perhaps when the 2011 data comes out we will have a better data set for more refined conclusions / projections.

    Jack Townsend

  6. Jack,

    Is there any way to get the 2011 data?


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