At the heart of the dispute is the IRS's implicit assumption that persons with offshore accounts are tax cheats and that taxpayers entering the program should live with its one-size fits all approach or, if they really think they can get a better result, then opt out and take the IRS's wrath on audit by examiners who would have the same attitude. (That statement as to wrath is hyperbolic, but that was the fear of taxpayers and practitioners.)
The context for the dispute was the IRS's decision to stop permitting OVDP 2009 participants to accept arguments resulting in an "in lieu of" penalty of less than 20%. OVDP FAQ 35 suggested that, in appropriate cases, the examiner could do that. Key excerpts of the article are:
In a rare taxpayer advocate directive (TAD) issued August 16, National Taxpayer Advocate Nina Olson ordered the LB&I and SB/SE commissioners to disclose and revoke the memo, direct that examiners follow FAQ 35 from the OVDP, and commit to release the memo and all voluntary disclosure frequently asked questions with guidance published in the Internal Revenue Bulletin. She also directed the commissioners to allow taxpayers who agreed to pay more under the OVDP than they would have under existing statutes to have the option to elect to have the IRS verify that claim, and in those cases of verification, for the IRS to amend the taxpayer's closing agreement to reduce the offshore penalty. (For the TAD and ensuing correspondence, see Doc 2012-134 . For the memo dated March 1, 2011, see Doc 2012-158 .)
Neither of the business division commissioners acquiesced to those demands, aside from releasing the March memo, and they instead appealed the directive to the deputy commissioner for services and enforcement, Steven Miller. Miller rescinded the remaining sections of the TAD, and the matter is now before Shulman, who must respond by the end of January.
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In the TAD, Olson told LB&I Commissioner Heather Maloy and SB/SE Commissioner Faris Fink that the March 1 memo meant the IRS had failed to follow taxpayers' reasonable expectations regarding FAQ 35 and had thereby opened itself to a legal challenge on the grounds that taxpayers reasonably relied on the IRS's guidance but were subjected to inconsistent treatment. Olson also objected to the IRS's failure to publish the memo and protested the decision in it to treat taxpayers whose OVDP applications had been processed before March 1 differently from those whose applications were not as far along.
Yet even before Olson issued the TAD, both the Taxpayer Advocate Service and the IRS engaged in a months-long negotiation to settle the matter privately.The article refers to the underlying memoranda and intrigues as the negotiations developed. The memoranda are fascinating reading, but probably not meaningful to most readers of this blog, even most tax professional readers. I will try to post a link to them if I can find an appropriate source for them with appropriate permissions. (Some lay readers like Just Me will almost certainly want to pore over every "jot and tittle." (See Wikipedia entry here.))
The article has ample quotations from prominent tax attorneys representing taxpayers in the initiative. In appropriate rhetoric, those quotations make the point that the penalty regime painted with too broad a brush, getting the innocent and the "guilty" (in the metaphor used in the comments on this blog, the minnow and the whale).
Taxpayers who entered the OVDP saw the position adopted in the memo as a bait and switch, Olson wrote. Many practitioners had encouraged clients who had not willfully evaded tax to enter the program on the belief that FAQ 35 afforded them the possibility of a review of their reasonable cause arguments, and they were dismayed to learn that the IRS wouldn't grant that review unless taxpayers opted out of the program.
"As long as the IRS makes it clear that it's an offer -- take it or leave it -- that's fair," said Matthews, a former IRS deputy commissioner. The problem was the switch in the IRS's perceived position, he said. That position represented a further obstacle for taxpayers in the OVDP, namely that "rooted in the DNA of the program, notwithstanding the good faith of the agents and those involved in this process, is the belief that the vast majority of these people were willful tax cheats," said Matthews.Note to readers: I suspect that Just Me had a significant role in getting the Taxpayer Advocate interested in the implementation of the OVDP 2009. We can only hope that this will have a ripple effect on OVDP 2011 implementation and the implementation of the general voluntary disclosure program after OVDP 2011.
Olson's recommendations reflected the surprise and frustration that practitioners and their clients felt when they encountered the limits of agents' discretion in the OVDP, Matthews said.
Shamik Trivedi, Marie Sapirie, and Jeremiah Coder, IRS, Taxpayer Advocate Spar Over OVDP Examiner Discretion, 2012 TNT 4-1 (1/6/12).
The underlying memoranda are at 2012 TNT 4-17 (containing several memoranda of the back and forth negotiations) and 2012 TNT 4-19 (containing a single memorandum dated March 1, 2011. The latter memorandum is available on the IRS web site here.
Addendum on 2/20/12:
Wesley Elmore, Shulman Won't Formally Respond to Taxpayer Advocate Directive on OVDP, Olson Says, 2012 TNT 34-6 (2/21/12)
This article reports the following:
1. IRS Commissioner Shulman has no plans to respond to the taxpayer advocte directive ("TAD") regarding OVDP.
2. There is some confusion regarding whether Commissioner Shulman is required to respond.
3. Apparently Commissioner Shulman is not required by law to respond except to recommendations in the Taxpayer Advocate's report to Congress; a separately issued TAD does not require a response.
4. Despite his nonresponse, the Commissioner and the Taxpayer Advocate met and had what she described as a "good meeting."
5. The Taxpayer Advocate is not giving up the issues presented and suggested that the TAD requires a more formal response. The article notes:
Olson said the TAD came about because the IRS was treating everyone participating in the OVDP with a "one-size-fits-all" approach that assumed they were "all people trying to rip off the federal government." The IRS should recognize that there are different categories of taxpayers in the program and should clarify what taxpayers in each of those categories should do under the program, she said. For example, taxpayers with no tax liability or minimal liabilities should be told to "go and sin no more," while taxpayers who show reasonable cause or who meet a non-willfulness standard should be allowed to opt out of the program, Olson said. She added that she believed some examiners were trying to provide taxpayers with such options before the March 2011 memo was released.