Megan L. Brackney, Kostelanetz & Fink LLP, New York, NY
David A. Breen, Senior Counsel, Office of Chief Counsel, SB/SE, IRS, Philadelphia, PA
Caroline D. Ciraolo, Rosenberg Martin Greenberg LLP, Baltimore, MD
David H. Dickieson, Schertler & Onorato LLP, Washington, DC
Mark E. Matthews, Caplin & Drysdale Chartered, Washington, DC
John C. McDougal, Special Trial Attorney, Small Business/Self-Employed Division, Office of Chief Counsel, IRS, Washington, DC
Richard J. Sapinski, Sills Cummis & Gross PC, Newark, NJ
Thomas J. Sawyer, Senior Litigation Counsel, Counsel for International Tax Matters, Tax Division, Department of Justice, Washington, DC
Zhanna A. Ziering, Caplin & Drysdale Chartered, New York, NY
For those having access to TNT, a good summary is Jeremiah Coder, Taxpayers Face Hurdles and Risks When Opting Out of OVDP, 2013 TNT 12-4 (1/17/13).
The following is my summary (parallel to in many respects but not the same as Mr. Coder's):
1. Megan Brackney, a practitioner, opened with a summary of the Taxpayer Advocates recent report. I have previously reported on the report in a blog entitled TA Report Identifies IRS' OVDP / OVDI As Problem (1/9/13), here. She presented the chart in the Report regarding processing times, opt outs, etc. She said that the low number of OVDI 2011 opt outs probably reflects the slow processing time to the point of opt out, with most cases not at that point yet. She noted that the average FBAR penalty on opt out, about $15,000, was encouraging that the IRS was not being punitive on opt outs.
2. Mark Matthews, a practitioner, suggested that, for the more benign players (referred to on this blog as minnows), the threshold decision of whether to even join OVDI (currently 2012 OVDP) is important. Certainly, for those joining with the expectation of opting out may have good alternatives to joining. I think his comments were consistent with the point I have made several times -- that the profile of someone who would opt out (i.e., no risk of willfulness (or its income tax counterpart, civil fraud)) does not obtain the principal benefit of the program in the first place -- eliminating the criminal exposure -- and thus have only an audit risk if they don't join which is the risk -- indeed the certainty -- they have if they do join.
3. One of the alternatives to joining the program he discussed was filing perhaps 3 years of amended returns and some number of years of delinquent FBARs (I presume perhaps 4-6 years). Mr. McDougal, an IRS lawyer heavily involved in the program and penalty assertion, countered with the oft-repeated claim that the IRS is screening amended returns reporting offshore account income (and presumably screening delinquent FBARs as well), but did acknowledge that it was a screening process and there is not 100% audit coverage.
4. Of course, historically, for taxpayers with criminal exposure, quiet disclosures by filing amended returns, was a practically effective -- if not guaranteed -- way to eliminate or mitigate the criminal exposure, but at the risk (but not often the actuality) of full bore civil fraud penalty exposure.
5. David Breen, an IRS representative, cautioned taxpayers with fraud exposure from opting out. Of course, opt-outs still get the benefit of no-criminal prosecution, but those with a profile benefiting from the assurance of no criminal prosecution are at high risk of the onerous civil penalties -- civil fraud penalty of 75% and the willful penalty. (Actually, depending upon the number of accounts, as noted below, the nonwillful penalty might be larger in some cases than the willful penalty, so I suspect that the IRS might assert the nonwillful penalty where that could squeeze out more dollars / punishment.
6. Mr. McDougal suggests that taxpayers considering opting out discuss the opportunities and risks with the assigned agent. The agent can be a helpful source of guidance that should be factored into making the decision. The agent will not give advance assurance, but since the agent usually processes the opt out, that information or at least signal in advance can be helpful. From Mr. Coder's article, Mr. McDougal said: "'Don't overlook having a heart-to-heart with the agent over the future of the case if you are trying to decide to opt out,' he said, adding that taxpayers should discuss whether to opt out of the OVDP with the revenue agent who handles the case to determine how the case might proceed under a traditional examination."
Caveat update on 2/1/13: The inference I drew from the actual McDougal quote immediately above was that the agent up to the point of opt out could and would discuss the possible opt out results. That agent has a lot of information up to that point and will likely be the agent handling the opt out. Therefore that agent could be in a position to answer the simple question of what would happen on the opt out if no further damaging information were developed on the opt out audit. That is not committing the agent or the IRS to anything and simply asks the agent for a signal solely based on the then known information. It is nothing more than a candid communication from the agent to the taxpayer/citizen. I think most people read Mr. McDougal's comments as suggesting that the agent could and would give that signal. But, in a case I am handling, I raised the question citing Mr. McDougal's comments and asked for a signal of the opt out result if no further negative facts are developed. In response, so the agent says, she contacted Mr. McDougal and he disavowed having said or intimated any such thing. Instead, she said that Mr. McDougal claimed that he meant only that the agent could state the worst case that could happen on audit -- i.e., the willful penalty for all years -- which is just a worst case analysis unrelated to any good or bad facts. That is a startling disavowal by Mr. McDougal of what I think is the the clear import of the words he used - which I heard and which others head as quoted in the article. If all the agent can do is state the maximum willful penalty that might apply on opt out, the agent offers absolutely no meaningful information because any practitioner or even a reasonably knowledgeable taxpayer knows what that maximum penalty is. I am stunned that Mr. McDougal would disavow the clear import of his words. I know these Government spokesmen caveat that they do not bind their Government agency, but for someone who the IRS must know is perceived as important to the process as is Mr. McDougal, the IRS should consider the wisdom of allowing him to speak if they don't want the audience to place some credibility in his comments. Now, having said all of that, I will say that the agent almost immediately after reporting that Mr. McDougal claims not to have said that the agent should discuss what would happen on opt out, did open up with some useful projection about what might happen upon opt out in my case. So, in a sense, Mr. McDougal's disavowal of the import of his words did not affect the outcome of my particular case. I report this only because I was stunned that, given the words he used, he would claim and readers may face the same disavowal if they raise the question. Still, on the notion that it does not hurt to ask, I think practitioners and taxpayers should always ask the simple question: "Based on what you know now, what would be the opt out results." Only if the IRS insists on playing games with its citizens should a responsive answer not be forthcoming.7. Just filing amended returns outside the program will eliminate the 20% accuracy related penalty under the qualified amended return ("QAR") regulation. However, it will not eliminate the civil fraud penalty. This just points out that those taxpayers whose facts indicate material risk of fraud (criminal and/or civil) are the best candidates to get into the program and to stay in the inside penalty structure for the program.
8. Mr. McDougal, also an IRS representative, cautioned that, in the analysis of whether to join or opt out, careful attention to the statute of limitations is required. If there is fraud, there is an unlimited statute, whereas joining the program and not opting out, limits the number of years to 8 years regardless of fraud in the earlier years. Mr. McDougal also noted that noncompliance with a John Doe Summons suspends the statute of limitations. He confirmed that three JDS have been issued -- UBS, Stanford Group and HSBC India. All of these were previously in the public domain. It is comforting that there appear to be no more, at least as of now, that are not in the public domain. There have been noises, however, that additional JDS's may be forthcoming (although this was not repeated at the webinar.
9. There seemed to be a sense, specifically articulated, that once a taxpayer joins, submits eight years of amended returns and pays the tax, penalty and interest inside the program, a taxpayer has lost that money forever even if the taxpayer is relatively "innocent" and opts out to "suffer" a regular audit. In a regular audit, the closed income tax years should be closed and the taxpayer should be returned the money, with interest, he paid for any closed years. And, even for open years the 20% penalty should not apply (argue QAR). I also do not believe that the taxpayer surrenders his right to refund of the income tax, penalties and interest for the closed years. Taxpayers must carefully watch their refund statute of limitations and take protective measures.
10. On consents to extend the statute of limitations (sometimes called waivers), Mr. Breen confirmed that the Form 872 extends the statute only if the statute was open when the consent was signed by the IRS but the consent (waiver) for the FBAR penalty is a traditional statutory waiver of an affirmative defense and thus applies to even years otherwise closed at the time it is signed by the IRS. (At least, that is the IRS's position and, I suspect, it is correct because there is no statute such as Section 6501(c)(4) that is interpreted to require an open statute when the consent is signed.
11. Mr. McDougal confirmed his view (not necessarily the IRS view, but influential because he is a major IRS player in the penalty process) that the Williams case is not properly read that a no to the 1040 Schedule B question about foreign accounts establishes willfulness. I think that is the right reading of the willful penalty. He emphasized that the decided cases -- Williams and McBride -- had bad facts beyond the Schedule B question. He encourages agents to develop all of the facts and circumstances.
12. Mr. Breen also confirmed the IRS position that the nonwillful penalty can be up to $10,000 per account per year. He said the IRS bases the position on the wording of the statute. Mc. Caraolo, a practitioner, made the argument that it should be $10,000 per FBAR, not per account. The parties will disagree on that and, presumably, although there are no cases now, there will be a time when this issue gets litigated and resolved (unless, I suppose, the IRS realizes the error of its ways and doesn't press the position).
13. Mr. Breen said that courts have agreed with the current (not past) IRS position that the standard of proof the IRS must meet for willfulness is a preponderance standard rather than clear and convincing. Only two courts have held that -- the trial court (but not the appellate court) in Williams and the trial court in McBride. I personally think the standard should be clear and convincing. I don't think that there is yet enough critical mass in the cases to assume that the standard is preponderance of the evidence. Of course, taxpayers litigating that issue must be prepared to defend on the preponderance standard, all the while pressing the clear and convincing standard in the hope that the court will see the light.
14. Mr. Sawyer, a DOJ representative involved (or to be involved) in the FBAR penalty collection efforts. I had to turn my attention to other matters at this point, so do not have anything to offer on it. Mr. Coder's article offers nothing of interest on his comments.