G. TAS Will Continue to Advocate that the IRS Modify the Offshore Voluntary Disclosure Program so that People Who Made Honest Mistakes Can Correct them Without Fear of Excessive Penalties
In the past few years, the IRS actively promoted the 2009 Offshore Voluntary Disclosure Program (OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (OVDI) . These initiatives allowed people who failed to file a Form TD F 90—22 .1, Report of Foreign Bank and Financial Accounts (FBAR), reporting foreign accounts and the income from those accounts to settle with the IRS by paying a single “offshore” penalty instead of several other penalties that the IRS might seek to apply, including severe civil and criminal penalties designed for willful violators. However, these initiatives were not promulgated through issuance of published guidance in the Internal Revenue Bulletin or even in the Internal Revenue Manual (IRM) . Instead, the IRS published and then often updated and revised the terms of these initiatives on its website. In the 2011 Annual Report to Congress, the National Taxpayer Advocate discussed her concerns about the “bait and switch” approach the IRS took in administering the 2009 OVDP and recommended several actions to restore IRS’s credibility among taxpayers and practitioners and promote fair tax administration based on the generally accepted concepts of due process, transparency, and procedural fairness.
Specifically, the IRS announced that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes,” prompting those whose violations were not willful to enter the program. On March 1, 2011, more than a year after the 2009 OVDP ended, the IRS issued a memo suggesting it would no longer consider whether a taxpayer would pay less under existing statutes . Those with inadvertent violations could either agree to pay more than they should or “opt out .” Given the confusion surrounding what penalty would apply outside of the program, many agreed to the offshore penalty. Continuing concern that the IRS may apply excessive penalties for inadvertent violations has generated public outrage among those with foreign accounts, such as U .S . citizens living in Canada.
The National Taxpayer Advocate also issued a Taxpayer Advocate Directive (TAD) recommending that the IRS take steps to address her concerns . The Small Business/SelfEmployed and Large Business and International Divisions appealed the TAD to the Deputy Commissioner for Services and Enforcement, who modified it without providing a satisfactory explanation or rationale. Following the Deputy Commissioner’s memo, the National Taxpayer Advocate elevated her concerns to the Commissioner of Internal Revenue for a formal response. The Commissioner has not provided a formal written response. However, the National Taxpayer Advocate has personally discussed her concerns and recommendations with the Commissioner.
TAS has also continued to assist taxpayers by issuing Taxpayer Assistance Orders (TAOs) when the IRS has failed to follow its public guidance with respect to the 2009 OVDP or 2011 OVDI. In response to one such TAO, the SB/SE Commissioner recently challenged the National Taxpayer Advocate’s authority to issue a TAO that directed the IRS to follow its procedures, review its determination at a higher level, and reconsider facts that it seemed to have overlooked.
While the Deputy Commissioner may modify or rescind a TAO, the scope of what a TAO may direct is necessarily broad. A TAO may order the IRS to “cease any action, take any action as permitted by law, or refrain from taking any action, with respect to the taxpayer” under enumerated chapters of the IRC dealing with collection or bankruptcy, or “any other provision of law which is specifically described by the National Taxpayer Advocate in such order.” Accordingly, a properly constructed TAO can order the IRS to take “ANY” action. However, the IRS may not always be willing and able to comply — and because of the TAO appeal process, the IRS retains the final decision-making authority.
Because the IRS retains the authority (and duty) to make substantive determinations, a TAO will only prompt the IRS to take actions that it is legally permitted to take based on its own determinations (not TAS’). For example, a TAO could not actually cause the IRS to change a tax assessment unless the IRS determined the change was legally permissible based on its own factual and legal determinations. In this way, TAS avoids becoming a second Appeals function.
The SB/SE Commissioner argued that the National Taxpayer Advocate had no authority to issue the TAO (described above) because guidance posted to the IRS website indicated that if a taxpayer disagreed with the IRS’s determination, his or her only option was to “opt out” of the settlement initiative. Thus, he reasoned, TAS could not issue a TAO requiring the IRS to reconsider its decision at a higher level or to consider facts that it appeared to have overlooked.
The National Taxpayer Advocate finds this reasoning flawed. Some IRS procedures allow taxpayers to appeal the determination to Appeals or to Tax Court, but none expressly authorize taxpayers to seek TAS assistance if they disagree. As the Treasury Regulations explain, a TAO is “not intended to be a substitute for an established administrative or judicial review procedure, but rather is intended to supplement existing procedures . In this case, the TAO is not seeking special relief outside of the established process. Instead, it seeks exactly what the regulations contemplate — a supplement to the existing procedures by having the IRS review at a higher level its preliminary determination under an established administrative procedure (OVDP). The fact that other administrative or judicial procedures might be available to the taxpayer in the future, i.e ., opting out, is of no consequence at this time . Based on the posture of the case, i.e., a TAO seeking review at a higher level, the current administrative procedure (OVDP) is appropriate. If the taxpayer later opted out and the IRS conducted a full examination, TAS could issue a TAO at that time elevating consideration of that administrative procedure, the examination .
Accordingly, if the IRS could so restrict National Taxpayer Advocate’s statutory authority to issue a TAO, it could prevent TAS from assisting taxpayers in any IRS process by simply issuing a statement on a website. The National Taxpayer Advocate strongly disagrees with the SB/SE Commissioner’s interpretation of her statutory authority and will seek to address it in FY 2013, including acting in accordance with her office’s understanding of the National Taxpayer Advocate’s statutory authority.
In addition, the National Taxpayer Advocate is looking forward to meaningful TAS participation in developing procedures for the new Offshore Voluntary Disclosure Program the IRS announced on January 9, 2012. TAS believes any such procedures should be published in the IRM or the IRB as formal guidance upon which taxpayers can rely. As described above, the National Taxpayer Advocate has provided specific recommendations about the general principles of how the formal guidance should be drafted as well as how to treat different categories of taxpayers . The amount of the penalty (or relief from penalty) would depend on the taxpayer’s category, with a broad anti-abuse rule.
In FY 2013, TAS will also continue advocating for taxpayers who were harmed by the IRS’s refusal to consider whether a taxpayer would qualify for less penalties under existing statutes according to FAQ#35 of the 2009 OVDP.Readers might also want to review the section beginning on p. 21 titled F. TAS Will Continue Advocating for American Taxpayers Abroad Who Are Expressing Fear and Frustration about FBAR, FATCA and Other International Penalties