Thursday, January 17, 2013

Report on Webinar on Opting Out and Litigating FBAR Penalties (1/17/13; with Caveat Update on 2/1/13)

Yesterday, I attended via computer the ABA Webinar titled Through the Looking Glass (Parts 1 and II) Opting Out of the OVDI Penalty Structure and Litigating FBAR Penalties (1/16/13).  The information about the meeting and  the participants is here.  The participants were:

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.


  1. Jack-
    There was an interesting discussion regarding the IRS's position to assess the FBAR penalty per account instead of per FBAR, I don't recall which of the Government lawyers it was, but one of them mentioned that the basis for the government's position is that the statute mentions "account" in the singular. This was countered by Ms. Ciraolo that the singular use of "account" is only in willful penalties but not in non-willful penalties. Additionally, she argued that the "stacking" of penalties runs contra to the policy of limiting the penalties as evidenced by capping the penalty at $10,000 per year. These points were not addressed by the Government.

    There were three different dates mentioned in the context of the statute of limitations for FBAR penalties. The first was the 6 year Statute. The next was the 8 years that the service requires the taxpayer to waive the right to the affirmative defense. The third date mentioned was "1997". I am not clear how this date comes into play at all and I was left waiting on the phone to ask for clarification when the program ended. Any clarification on how FBAR penalties can be assessed as far back as 1997 would be greatly appreciated.

    Lastly, can you clarify how the government can assess a penalty past the statute of limitations? What basis does the government have in making the assessment pass the statute expiration? Even if I waive my right to raise the Statute as a defense, hasn't the "grant" to the government to assess these penalties expired?

  2. Jack - all these topics have been discussed in detail on your blog. If anyone has any question about any of the above topics they can search through your blog and find a wealth of information on them.

  3. The IRS cannot legally assess an income tax after the statute has expired. The taxpayer cannot waive an expired statute of limitations for income tax. These rules are based on the wording of the statute.

    But, for the FBAR penalty, there is no similar textual requirement as to waiver at all. There is simply a statute of limitations. The IRS takes the position that, like other statutes of limitation (other than the income tax), statutes of limitations is an affirmative defense that can be waived. So, when the participants in OVDI signed the FBAR consent form, they waived those statutes of limitations.

    I don't know what the 1997 date means, other than, as I recall, someone may have used the date as an example of the IRS being able to go back to pre-2003 years if the taxpayer opts out and fraud is involved for an earlier year (such as 1997).

    Jack Townsend

  4. Thank you very much. I really appreciate it.

  5. Elie, a reader explained to me by email that the 1997 date is as follows:

    David Breen referred to the 1997 date in connection with how far the IRS can look back for nonfiling of Forms 5471, 3520, etc… The SOL provision allowing for the statute to remain open in case were such forms are not filed is contained in section 6501(c)(8), which was amended in 1997.

  6. Thank you for the follow up. I really appreciate it.

  7. Hi Jack, With regards to point #8, does this mean that if past non compliance was with any bank which got the john Doe summons, then the statute for FBAR (6 years) will never expire?

  8. Section 7609(e)(2) that "if the IRS and the summonsed party do not resolve compliance with the summons, the civil and criminal statute of limitations for the taxpayer with respect to whom the summons was issued is suspended from a date six months after the summons was issued until compliance is finally resolved." Section 7609(i)(4) requires the John Doe summonsee is required to notify the ultimate taxpayer(s) – the “John Doe(s)” – of the statute suspension, but the statute is still extended whether or not the John Doe summonsee gives that notice. So, if the system is working correctly, the ultimate taxpayer(s) will know of the statute extension potential. There is no way of being certain, however, about what constitutes compliance so as to lift the suspension period.

    You might review these provisions here: here:

  9. Hi Jack

    Regarding your 2/1/2013 update to #6 above, I had an even stronger exchange recently with an agent. the agent I am working with told me that their administrative guidelines preclude discussion of opt-out consequences and whether the taxpayer would qualify for the Streamlined procedure UNTIL the taxpayer has actually opted out. This is directly contrary to Mr. McDougal's comments.

  10. As Nina Olson said in her report, by answering with the maximum penalty, the IRS is actually pressuring the taxpayer into paying the OVDI in lieu of penalty. This IS coertion - not just infringement of taxpayers right as she mentioned in her report. They're playing a dangerous game of poker.
    Why don't they at least mention the FBAR mitigation penalty guildelines based on the amount of the accounts that is listed in the IRM?

    This is depressing. They don't listen to the tax payer advocate, and do exactly the opposite of what she suggests in her report, erroding more and more taxpayers confidence in the system.
    They might as well discontinue the program and let the willful people directly deal with the CIs in a traditional VD program. I am totally disgusted in how the system works. This is a shame. This should not happen in the US. There is no justice anymore.
    Is there anything tax lawyers associations can do to make the IRS see that what they're doing is wrong.

  11. I initially had difficulty seeing why Jack was so stunned by Mr. McDougal's follow-up comments. My thought was that Mr. McDougal didn't really offer anything substantial during the Webinar beyond, hey, ask the agent what he thinks might happen in an opt out (my paraphrase). Any answer by the agent would not be a commitment, and would be subject to modification by the agent's manager, technical advisor, IRS counsel, etc. Thus, what Jack termed to be Mr. McDougal's "startling disavowal" didn't appear as such to me because I didn't get the impression that Mr. McDougal offered much initially.

    As it turns out from opt-outs that I am handling, and this has also been corroborated by other attorneys who handle opt-outs, the agents are being very reticent about what might happen in an opt-out. The agents will agree to a call about opt-out, usually with an IRS manager present on the call, but they will offer little apart from informing us that (a) the taxpayer will be subject to a full examination (not merely a certification as to accuracy), (b) the agent will examine issues like intent, what the taxpayer knew or should have known, educational background, etc. (such issues not being relevant in the certification), and (c) the maximum penalties may apply. As Jack wrote, practitioners know all of this already. The agents are offering little information about the big questions, which are: (1) Does the agent think that willful penalties might apply, or only non-willful?, and (2) If non-willful, then would the penalties be per year, or per account per year?

    The taxpayer thus is required to make an irrevocable decision to opt out, without knowing what penalties he faces in an opt out.

    And thus, while in principal Mr. McDougal's recommendation of having a "heart-to-heart" with the agent might be a good idea to get a feel for how the opt out might progress, in practice, the discussions are far from a "heart-to-heart" and have not proven to be helpful. The reticence of the agents and their citations to the maximum possible penalties do not really help taxpayers in their decisions of whether to opt out.

  12. So, you thought that all McDougal was saying was that the agent would simply spew back the willful 50% numbers for all years? He could have said that, if that is what he wanted to say. And he should have said that rather than what he is quoted (and as I remember) as having said.

    Thanks, as always, for your thoughts.

    Jack Townsend

  13. Would you mind commenting on the FBAR mitigation guidelines that are listed in the IRM?

    What don't anyone mention them?

  14. I thought over time, enlightenment might come, but I guess not! It is hopeless with these guys, it seems.

  15. Different Anonymous here. I just tried the link and it works fine. I use Mozilla Firefox browser, don't know if that makes a difference.

  16. The document can also be accessed through this link:

    Hope it works this time.
    Best regards

  17. That is the same thing I have found to. I could get to the Moskowitz site, but the download would not start...I have tried several options. The one that finally got it for me, was right clicking, and then choosing the option "save link as..." That got it to download.


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