Friday, January 6, 2012

Tax Notes Discusses Dispute Between the Taxpayer Advocate and the IRS About OVDP 2011 (1/6/12)

Tax Notes Today has a fascinating summary, with underlying documents, of an internal dispute between the Taxpayer Advocate and the IRS about the administration of OVDP.  Shamik Trivedi, Marie Sapirie, and Jeremiah Coder, IRS, Taxpayer Advocate Spar Over OVDP Examiner Discretion, 2012 TNT 4-1 (1/6/12), here..

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 Miller rescinded the remaining sections of the TAD, and the matter is now before Shulman, who must respond by the end of January. 
 * * * * 
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.
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.
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.

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.


  1. Shamik's article is a fantastic read. He is a professional who truly understands not only the Gordian knot that is international tax but also the magnitude and importance of the Taxpayer Advocate's Directive.

    It is great that the TAS has taken such a strong stand against the IRS and shifting rules of the OVDP. As a practitioner I am hopeful that the TAS's Directive will inspire the Service to address similar problems with the 2011 OVDI quickly and without having to resort to such extraordinary measures.

  2. Wow, this is fascinating, and you are absolutely correct... "I will almost certainly want to pore over every "jot and tittle."

    Thanks for posting this and actually really making my day!

  3. The TAS is to be commended. Way to go Nina Olson!

    Still the FBAR law has been wrongly applied to too many people. It should not apply at all to folks like me who live and have accounts in Canada (and many other countries). We have thousands up here who are still in fear and don't know what to do.

  4. Thanks for highlighting this post Tax Notes. I think it is one of the more significant developments I have seen, and I really congratulate Nino Olsen for taking this on.

    Now, as I understand the process, Commissioner Shulman has to respond, and ultimately the final decision is his. The buck stops at his desk, and there are no further appeals. He has two choices.

    One, is to uphold Nina’s ruling, and if so that is good news for all the OVDP participants who just rolled over and paid their 20% out of fear, or never had the chance for a FAQ 35 reasonable cause argument.

    Two, he can rule against Nina.

    If he refuses to uphold her directive, which is his right, he still has to report to Congress that he has done so, and why. In this political year, it will be interesting to see what he does. This forces Congressional visibility on a subject that has been very much mis-characterized both by the IRS and the press, and could be come political.

    In light of recent IRS actions to try, by unilateral regulation, to enforce the domestic version of FATCA, or DATCA (as I call it) on US Banks over the oppositions of some Republicans in Congress, I wonder how much visibility he wants on this issue. If he rules in the negative against Nina and has to report, how politically partisan will this become? That is the key issue to me. I personally would rather have logic prevail over than political partisanship and have the IRS do the right thing and follow Nina’s directive, but I know that is not how it works in DC. Very very interesting and significant, I think, but then what do I know, as I am just me.

  5. I hope TAS will stop IRS imposing penalty on immigrants' retirement plan. Most middle age immigrants coming to US have some retirement plan in their native countries. It is so wrong if IRS treats these retirement plan the same way as those financial accounts that have tax real implication.

  6. Hello all. It’s time to warm up your fax machines and telephones. We need to contact the House Ways and Means Committee and the Senate Subcommittee on Taxation and IRS Oversight. See members / contact info below. Let’s flood them with faxes / calls (fax / call once a day if you like) and let them know what you think of Nino Olsen, the work of the TAS, and the draconian impact of the OVDI on immigrants and expats who are not tax cheats!


    Ways and Means Committee Office
    1102 Longworth House Office Building
    Washington D.C. 20515
    P: 202-225-3625
    F: 202-225-2610

    Press Office:
    Ways and Means Press Office
    1101 Longworth House Office Building
    Washington, D.C. 20515
    P: 202-226-4774
    F: 202-225-2610


    Kent Conrad, ND

    Max Baucus, MT
    John F. Kerry, MA
    Charles E. Schumer, NY
    Ron Wyden, OR
    Maria Cantwell, WA
    Bill Nelson, FL
    Robert Menendez, NJ
    Thomas R. Carper, DE
    Benjamin L. Cardin, MD
    Ranking Member
    Jon Kyl, AZ

    Olympia J. Snowe, ME
    Mike Crapo, ID
    Pat Roberts, KS
    Michael B. Enzi, WY
    John Cornyn, TX
    Tom Coburn, OK
    John Thune, SD

  7. Go Nina!

    Open letter to Commission Shulman.

    Do the right thing! Affirm the TAD. Begin the process of restoring some trust in the IRS. If there is any grace, fairness and justice left in DC, then that is what you will do.

    Nina's position is exactly correct, and I would bet my filed FBARS that a survey of your OVDP examiners would support her findings.

    Just man up and admit it. In designing the VDP, no one at the IRS considered the consequences for benign failures of the Minnows: Expats around the world, or immigrants who have come to America but didn’t understand the world’s most complex reporting requirements. You were just anxious to net the UBS evader Whales. You did nothing to inform immigrants that they had any FBAR obligations at their visa issuance, or citizenship ceremonies. You did everything you could to frighten Expats. Filing their FBARs going forward, and doing quiet disclosures to become compliant was not an option. Once a Minnow became aware of their failure, they had no choice but to enter the OVDP and be subject to a 2 year grinding process. To do otherwise, was a willful act, and heaven knows you don’t want to do that! Letters appealing to your office that you find a way to separate Whales and Minnows at the front end of the process rather than in an Opt Out at the end, went unheeded.

    Well, now you have the TAD. Please deal with it in a manner that will restore some respect.

    Let’s face it. You have had to back track several times in changing your VDPs. Changing some FAQs on the fly here, adding technical adjustments for smaller threshold accounts amounts there, as you began to realize you were netting lots of Minnows just trying to be compliant. Still, you did not correct your press releases leaving the media impression that you were catching more Whales than I think you did. But then, without a FOIA, I don't really know.

    You have allowed your program to be called an amnesty. If compliance was your objective of this amnesty, I do think it has failed. If you really wanted to bring all those Expats and immigrants into the fold, then you should have conducted a VDP the way Canada does. See link below

    "The VDP allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information... without penalty or prosecution....the taxpayer will have to pay the taxes or charges owing, plus interest. However, the taxpayer will not be subject to "penalty" or prosecution ...."

    Now compare that to your most recent VDP. - 27.5% penalty on 8 year highest aggregate of all accounts and FMV of assets, plus interest, plus a 20% accuracy penalty for tax underpayment!

    And you wonder why Expats overseas and new immigrants to America aren’t all that excited about your proposals, and why some immigrants are just silently leaving, and Expats in Canada are mobilized to oppose FBARS and FATCA.

    The core problem with the VDPs and new FATCA policies is the US system of citizenship taxation combined with your over-the-top enforcement. Even the Economist in a recent article called “Dutchman Trapped,” noted. “America’s unusual requirement that its passport-holders pay it tax no matter where they live gives many qualifying residents good reason not to apply.”

    Good “reason not to apply”, indeed!

    You now have expats like me, combining voices with US immigrants in a duet chorus of warnings to new aspiring skilled immigrants, “Don’t do it! Don’t take any action (immigration, marriage, adoption, or US investment) that could trap you into becoming a “US person”. The cost is just too great!”

    I just issued two today! Was that the goal?

    Bottom line, the last 3 years of VDP jihad with the addition of FATCA, has done serious harm to the US reputation around the world. It is resulting in very negative press while most in Kansas are oblivious. Now is the time to start a trend reversal.

    Please show me that you haven’t lost the plot!

    Thank you.

  8. The taxpayer advocate came out with a very strong negative report yesterday on the IRS's foreign account disclosure program, specifically FAQ 35 for the 2009 program. This also includes a lot of the to and fro letters between the TAS and the IRS on the OVDP.

    I think this makes the position of someone considering opt out in the 2011 program stronger, since it puts the IRS on notice that their procedure for opt-outs has to be fair and utilize discretion.

    Ms. Olson could also help by informing lower lever TAS employees to treat foreign account cases as a priority issue. So far that doesn't seem to have happened. Our own 'ij' reported communicating with the TAS and being essentially told they could do nothing. Although it might have been procedural in that he had not received a closing statement

  9. Dear Captain Just Me,

    Very well written letter !!! I admire your courage and sense of justice even in fact you are out of the OVDI woods already. Folks, let's united to fight for justice. I think there are few things OVDI should change that will make it fair.

    We have a good chance to win these two
    1. Immigrants/expat offshore retirement plan should be excluded in penalty regardless if there is a treaty or not.
    2. Penalty for those over 75K should be gradual, not like a delta function (sort of) jump.

    These two may be long shots but worth to try

    1. Penalty should be on due tax rather than total amount of offshore assets as the program is in the name of enforcing tax compliance.
    2. Total wavier FBAR penalty on expats/temporal visa workers

    To Anon of "Jan 12, 2012 04:36 AM", I was asking TAS for possible involvement on dealing with RRSP penalty. The person picked up the phone was not aware of OVDI and she thought I had a fraud problem on my tax return -- technically, it was indeed the case as I filed a fraudulent return. It was only a phone call, so it was not really a assigned case of TAS.

  10. OVDI 3 will cause more expats and dual citizens to disappear abroad.
    The penalties for some ex pats are a life long income equivalent.
    At this stage US expats, immigrants and dual citizens are in need to see a true leader emerge and find a solution for this mess.
    Shulman is looking like the ex Lybia dictator with his green booklet.
    He is unable to lead or manage this mess.
    The IRS need to find a true fair leader who can leverage the 8 million expats and the 39 million immigrants to help rebuild the US after the imminent financial collapse due to Big Goverment and bad unconstitutional regulations like FBAR.

  11. I think leadership is emerging but not in the usual places like ACA or the U.S. political parties' overseas organizations. People are so desperate for information, and someone or something to cut through all the confusion, that they are flocking to places like the Isaac Brock Society (full disclosure I recently joined them as a contributing blogger). The site is seeing some extraordinary traffic.

    My sense is that whatever the IRS does at this point, it better be something concrete and clear and a real effort must be made to reach American expats everywhere. Not all overseas Americans live in urban areas and many don't follow the American and Canadian media very closely. Trust is nearly zero right now. After the last "amnesty" program even I (and I was not particularly involved at that point) started hearing the stories circulating about people being crucified for unintentionally not filing that damn form (FBAR's). People don't know what to think at this point.

  12. I am a recent immigrant to the US.

    The mistake I made was in how I viewed the United States. I could not conceive of the US as a country where I could possibly end up in the position I now seem to be in.

    Had I known that the US expected me to file a form informing it that I had a Canadian bank account which contains the money I saved during my life in Canada during which time I had nothing to do with the US , I would have filed that form upon entering the US.

    What the officer processing my paperwork said when he cleared me to enter the US as an immigrant was "Welcome to the United States". He didn't mention that the IRS was waiting to seize my life savings if I didn't fill out the correct form no one was telling me about.

    As far as I can tell, my options now are I can either submit to a process where it is assumed I am a criminal, where I will be required to sign away rights that I have, or I can retroactively file the correct forms and wait for the IRS, who say if I do this they will be even more convinced I am a criminal, to call.

    I wish I had never come to the US. I would have left by now except I am married to a US citizen with deep roots here.

  13. "Last thing I remember, I was
    Running for the door
    I had to find the passage back
    To the place I was before
    "Relax," said the night man,
    "We are programmed to receive.
    You can check-out any time you like,
    But you can never leave!"

    Lyrics to a verse of Hotel California by the Eagles. Makes you wonder if they had experiences with the IRS and their demoralizing programs. Its a horrible situation and I really pitty those that step into the 2012 program. They will probably get done in 2014 or later (assuming they join in 2012) unless congress steps in or the TAS TAD 2011-1 makes a difference. This entire episode is simply gestapo terrorism inflicted to extort money from simple common folks in most cases.
    Why would you implement a program that requires two years to complete, requires very expensive legal advise to understand, scares the hell out of people who are confused and depicts deception in some of the written guidance posted by the IRS. Do these attributes sound like a good way to convince people to come forward? Not to me! Maybe only the real heavy duty tax evaders that skimmed money to set up accounts offshore and hid behind entities and what not to disguise ownership. Maybe they deserve this hell but the innocent minnows do not and 9 to 1 that is the bulk of these cases.


  14. And Tax Notes apparently now says, Shulman isn't going to respond to Nina's TAD, as he says he doesn't have to. So, as I feared he is just going to Stonewall Nina and dare her to try and do anything about it. I have been saying this was going to be the out come. I hate it when I am right!

    And this is the example of law abiding Leadership?

    Since I don't have a subscription to Tax Notes, I will have to take Roth's word for this. If this is wrong, I hope someone will correct me...

    Roth says...

    Tax Analysts reports that IRS Commissioner Doug Shulman will simply ignore his statutory duty to respond to a Taxpayer Advocate Directive on abuses of offshore taxpayers in the Offshore Voluntary Disclosure program. From the story ($link):

    IRS Commissioner Douglas Shulman has no plans to respond in writing to National Taxpayer Advocate Nina Olson's taxpayer advocate directive (TAD) on the IRS offshore voluntary disclosure program (OVDP) despite a statutory requirement that taxpayer advocate recommendations be responded to within 90 days, Olson said February 17.

    According to Olson, who spoke at the Individual and Family Taxation session of the American Bar Association Section of Taxation meeting in San Diego, Shulman told her that section 7803(c), which requires the commissioner to formally respond to any taxpayer advocate recommendation within three months of its submission, applies only to the taxpayer advocate's annual report and not to recommendations made through TADs or taxpayer assistance orders (TAOs).

    So, my question is, Is Shulman's assertion correct and lawful? I would be interested in any attorney knows the statutes here would venture an opinion.

    Of course, laws aside, what would have been the right and moral thing for Shulman to do? Yes, he just "willfully" chose the opposite.

    Roth has this right....

    "If there was a 50% annual penalty assessed on the balance of the Commissioner's bank and retirement accounts for failing to respond on time -- the same penalty that he is gleefully assessing on offshore account non-reporters -- I bet he would have responded."

  15. Well this fits right into the pattern of Geithner and Rangel. There are different standards for the lords than for us the common people. The lords do as they please with no worries. We on the other hand get hauled out to the woodshed and after getting our drubbing and have our pockets picked by vultures. Sad!


  16. Just an update on this dispute which was never resolved and Shulman just stonewalled Nina...

    American Citizens Abroad has just issued this Press see if it is possible to get any traction on this issue that Congress has just ignored... Given the current IRS controversy, maybe they are in more of a mood to review IRS abuse of its discretionary or NON discretionary powers. Hope springs eternal, although I doubt they care, as there will not be any political advantage to be had to support a group who no politician has as their specific constituency.

    "ACA has written to the Congressional Panel Investigating recent IRS abuse about the 2009 Overseas Voluntary Disclosure Program (OVDP) and the targeting of Americans overseas for penalties who were simply ignorant of their filing responsibilities and were not hiding assets or involved in criminal tax evasion. Many of these benign actors were assessed criminal tax evasion penalties for simply having forgotten to report accounts on annual FBARs. This when the IRS had discretion to review cases and determine those who were acting willfully and non-willfully. The ACA Press Release is here as well as a copy of the letter to the Congressional Panel."

    BTW. I am the original Just Me. Not sure why I have been unable to access it anymore with Disqus, so am now using Just_Me_Also

  17. Excellent letter, I hope it gets some action. In addition to overseas Americans (the ACA's focus) there are also foreign-born US citizens or permanent residents, who are in a similar situation because they accumulated savings prior to immigration, inherited from a foreign family member, or sent fully taxed money overseas for future retirement, and who were not attempting to evade taxes but were simply unaware of foreign account reporting requirements. They are being subject to the same 27.5% asset-based penalty as the most willful. And they are forced to accept 27.5% because they are being threatened with the possibility of losing 50% (if not 300%) of their foreign assets.

    Thanks for clarifying that "Just Me Also" and "Just Me" are one and the same. And thank you for your continuing efforts to bring fairness to others, even after your case is over.


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