Warnings on Continued Government Patience for Offshore Account Ostriches (1/31/13)

A Tax Notes Today article reports that the Assistant Attorney General for the Tax Division, Kathy Keneally, has warned that amnesty for offshore account evasion will not last forever.  Jeremiah Coder, Keneally Says Government's Patience with OVDP Holdouts Has Limits, 2013 TNT 21-3 (1/31/13).  The opening quotes are:

The Justice Department Tax Division and the IRS will not forever offer criminal amnesty to taxpayers who continue to avoid reporting their undeclared offshore bank accounts, Kathryn Keneally, assistant attorney general for the Tax Division, said on January 29. 

Account holders should disclose their accounts through the IRS offshore voluntary disclosure program (OVDP) as quickly as possible, "because sitting it out at this point is extremely dangerous," Keneally said at a roundtable discussion held at the University of Southern California's annual tax institute. If a taxpayer knows a criminal investigation is underway, "it's too late" to enter the OVDP and avoid investigation by the DOJ, she said.  

Several offshore cases that started out as civil IRS exams have now gone criminal, Keneally said. "This idea of sitting it out, and if the government goes after me I'll only have civil penalties to deal with -- people need to get over that," she warned.

JAT Note:  She is right, of course.  But there is nuance in what she says.  When advising a U.S. taxpayer with this problem whether to enter the applicable version of the IRS OVDI/P  program, the key initial inquiry is whether that taxpayer has material criminal fraud risk and, correspondingly, material civil fraud risk that might result in the civil consequences of fraud (specifically, (i) for income tax, the unlimited statute of limitations and the civil fraud penalty) and (ii) the civil fraud FBAR counterpart, the willfulness penalty.  If those risks are material, the taxpayer certainly should get into the program.  If those risks are not material, then getting into the program may offer very little benefit.  The reason is that can happen when the risks have been accurately assessed to be minimal is that the taxpayer will be subjected to civil audit if the IRS chooses to audit.  Inside the program, the taxpayer with that profile will usually be a candidate for opting out and, upon opt out, will get an audit.  The taxpayer is no worse off and, indeed, the taxpayer may  be better off if he or she is not audited.  Of course, accurately assessing the criminal prosecution risk and the civil fraud consequences requires experienced judgment because of the consequences of missing a material risk assessment.

The article continues:

Taxpayers trying to stay hidden despite the numerous offers by the IRS and DOJ to shepherd individuals into the various offshore voluntary disclosure programs will find it's too late for clemency when the government announces an indictment against a financial institution where the taxpayer had an account, she said, adding that "there is some tension about how many warnings people need." Some officials want to seek indictments of everybody who held out because "they had the chance and didn't come in," she said.

JAT Note: Readers should note this.  Although publicity is not a perfect barometer of which banks the Government will indict, it is likely that there will be public information of the Government's unhappiness with banks in advance of indictment.  Hence, those taxpayers continuing to play ostrich on this matter, might want to pay attention to the public information of dissatisfaction with foreign banks.

The article continues:

Although the government has achieved great success persuading many taxpayers to come clean, report previously undeclared foreign accounts, and pay owed taxes, "we are far from done in this area," she said, adding that the government is "looking everywhere" for taxpayers who have failed to file foreign bank account reports and pay proper tax. 

The government is getting "a wealth of information" from a variety of sources, Keneally said, in part because bank secrecy laws are falling around the world and the implementation of the Foreign Account Tax Compliance Act is enticing foreign jurisdictions into cooperation with the U.S. 

As taxpayers look to move their money from countries under scrutiny to new safe havens, the Tax Division is focused on keeping ahead of tax evaders. "If you know anybody who still has money out there thinking that's the right thing to do because compliance isn't worth it to them, that's just dumb," Keneally said.

JAT Note: Persons with offshore accounts who continue their noncompliance are indeed dumb.  I have always advised clients who adopt a go-forward strategy that, from that day forward, they must be in full compliance.  Other course, go-forward compliance will increase the risk -- probably a difficult to assess risk -- of discovery of past sins.  But, the minimum compliance required is go-forward in all events.  Then, as noted above, if the downside risks have been properly assessed to  be immaterial, the taxpayer's risk is the non-fraud civil penalties (the usual statute of limitations, the 20% accuracy related penalty, and the nonwillful FBAR penalty).

Finally, the article continues:

The notion that a civil FBAR penalty will be capped at 50 percent of the account's value for one year does not represent "a set high-water mark," Keneally said. "Where we will go with the civil penalty remains to be seen, but I don't see that in a plea agreement [using] one year at 50 percent" is the guideline to be followed, she said. When a case has all the indicia of a crime but for some reason the DOJ has not pursued criminal prosecution, a higher penalty might be a fair resolution of that case in the civil context, she said.

JAT Note:  The conventional wisdom has been that delta, or difference, the willful penalty (if asserted either outside the program or inside the program on opt out of the inside penalty structure) would be 50% high year FBAR penalty.  That wisdom was based on the fact that, in the criminal cases pursued to date, a plea agreement subjected the taxpayer to a 50% high year FBAR penalty.  And, I have heard at least one prominent Government player on a panel specifically make the the statement that that was the high willful penalty.  The AAG at least threatens otherwise, although I think her comments are meant to apply to persons who stay out of the program and are willful (a bad strategy as I note above).  And,  it would still seem odd to me that she would suggest that those not criminally prosecuted may get a greater willful penalty than those criminally prosecuted unless the Government starts upping the willful penalties demanded in the criminal cases.  Moreover, where DOJ Tax and the IRS can really go with that notion -- as oppose to merely making threats -- may raise constitutional issues.  I have discussed this before, with the principal discussion at FBAR Penalties and Excessive Fines (Federal Tax Crimes Blog 3/5/10), here, where I cite Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty, J. Tax Prac. & Proc. 69 (2009-2010), here.  I also have other blogs that approach the issue less directly, so readers might want to click on the link below to pick them up.

A DIGRESSION

In the caption to this blog, I used the word ostrich in the context of U.S. taxpayers with offshore accounts used for tax avoidance who have not joined the voluntary disclosure program.  The term ostrich is also used in the context of conscious avoidance (also known as willful blindness or other similar terms) to describe the person who intentionally avoids learning a key fact that, if known, would establish the criminality of his conduct.

Technically, I used the ostrich analogy incorrectly.   In United States v. Black, 530 F.3d 596, 604 (7th Cir. 2009), vacated and remanded ___ U.S. ___ 130 S. Ct. 2963 (U.S. 2010), Judge Posner came to the defense of the ostrich  in the context of conscious avoidance as follows: 

The reference of course is to the legend that ostriches when frightened bury their head in the sand. It is pure legend and a canard on a very distinguished bird. Zoological Society of San Diego, Birds:Ostrich, www.sandiegozoo.org/animalbytes/t-ostrich.html (visited June 12, 2008) (“When an ostrich senses danger and cannot run away, it flops to the ground and remains still, with its head and neck flat on the ground in front of it. Because the head and neck are lightly colored, they blend in with the color of the soil. From a distance, it just looks like the ostrich has buried its head in the sand, because only the body is visible”). It is too late, however, to correct this injustice.