Thursday, January 31, 2013

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.


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, (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.


  1. Thanks for your nuanced comments.

  2. Jack,

    There is no question that if there is a risk of criminal prosecution, OVDP is worthwhile. And if there is a risk of imposition of civil tax fraud penalties or the willful FBAR penalties, then the OVDP is worthwhile. But your comment that “[i]f those risks are not material, then getting into the program may offer very little benefit” troubles me. My concern is that there seems to be a suggestion of a third category (i.e., category 1 = criminal, category 2 = civil fraud/willful), where there is some sort of guaranty of only non-willful penalties. How can it be that a taxpayer can definitely escape the civil fraud/willful penalties if he doesn’t enter the OVDP and is discovered?

    We know that the IRS considers not “checking the box” on 1040 Schedule B, coupled with the use of the account (e.g., accessing funds), to constitute willfulness. Even putting that aside, based on the many fact patterns I have seen over the past few years, there is a definite risk that a taxpayer could find himself looking at a willful penalty assessments. There are just so few fact patterns where I am able to tell a client: you will, definitely, only be looking at non-willful penalties. And, as such, I think I am more conservative than advising clients to stay out of the OVDP and play the audit lottery.

    Even if there is some way to arrive at a conclusion, outside the OVDP, that only non-willful penalties would apply to a taxpayer’s non-compliant account, the penalties outside the OVDP could still exceed OVDP penalties if the IRS imposes $10K FBAR penalties PER ACCOUNT PER YEAR, which we know is a possibility (see your post from two weeks ago about the Opt-Out webinar). And despite the questionable interpretation of the relevant statute to allow per account/per year penalties, and the injustice of such a result, I suspect that none of my clients would take the risk and be willing to litigate against the IRS per account/per year position. But for clients with only a few small accounts, I can understand your point, even though its application would be in very few cases based on the many offshore fact patterns I have seen.

    On the issue of the risk of audit if the taxpayer doesn’t enter the OVDP, if the IRS gets to the taxpayer’s account on its own (via treaty, John Doe summons, whistle blower, related case, etc.), then the taxpayer would then be at the mercy of the IRS, without even the ability to argue that s/he attempted to come clean. And if, instead, the taxpayer proceeded with a quiet disclosure, we already know that would give rise to a heightened risk of audit. In either case, willful penalties are likely.

    It seems to me that unless you can tell a taxpayer that, even if s/he doesn’t enter the OVDP, willful penalties are still unlikely, or that the IRS will stop at non-willful penalties, and because such a low-risk assessment is unlikely or impossible, then OVDP makes as much as sense as if the taxpayer was trying to avoid criminal tax charges.

  3. "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. . . "

    This is significant, and marks a difference in the 3rd and most recent OVDP versus the 2011 and 2009 disclosure programs.

    OVDP FAQ 21, added in 2012, puts taxpayers/potential OVDP applicants on notice that an entire class of taxpayers, i.e., those with accounts at a certain foreign bank to be announced, may be ineligible for the OVDP in the event of US government “action” against that foreign bank. This new provision coincided with the US government’s action against Liechtenstein Landesbank (LLB) in 2012. Although LLB was then announced as a target of DOJ investigation, notwithstanding new FAQ 21, the IRS did not make US clients of LLB ineligible for the OVDP. Presumably, if/when DOJ goes after a foreign bank in the future, FAQ 21 could be used to reject OVDP applications by US clients of that bank. However, I would expect some measure of time between an official announcement against a bank, and invocation of FAQ 21 to disallow clients of that bank into the OVDP. The announcement would, of course, incentivize coming forward. The important question is how long the OVDP door will remain open to US clients of that bank.

  4. Asher,

    Thanks for your comments. They are always insightful. My responses.

    1. Al of this is risk analysis by seasoned professionals. As a risk analysis, there are no guarantees. The only comfort the client has is that the professional is competent and makes a conservative risk analysis if that is what the client wants. If the client wants certainty, as I tell all my clients, your only choice is to get into the program and do not opt out. Then the result is certain.

    2. Even for clients inside the program, the professional has to make a risk analysis without certainty in advising the client whether to get opt out. There is no certainty in that analysis. So the client looking for certain has to not opt out.

    3. Professionals can do a meaningful risk analysis as to whether a client will be subject to the willful penalty. I disagree with your conclusion that there are few fact patterns that pose a material risk of the willful penalty. Perhaps my anecdotal data set of clients is different than yours, but I think for many opting out or not getting in in the first place -- which means no material willfulness penalty risk -- is an acceptable risk.

    4. I don't think that, in appropriate cases, the IRS will insist on opt out or on regular audit the IRS will assert the maximum nonwillful penalty of $10,000 per account per year. I know that is a possibility, but in my experience that is not a meaningful risk, again in the right cases. I think that is even inferred from the Taxpayer Advocates statistics that showed average nonwillful penalties of $15,000 on opt out. The average would have been much,much higher if the IRS were insisting on opt out on the maximum possible nonwillful penalty under its interpretation of $10,000 per account per year.

    5. The IRS has not signaled that it will treat opt out audit taxpayers better than regular audit taxpayers. I think many taxpayers have the hope that it will do so, because they can argue that they initiated the disclosure and did not wait for the IRS to catch them. But the IRS has not said that benefit of joining and opting out will be conferred. Rather, what they have asserted early and often is that the taxpayer gets the regular audit results on opt out. That is why I have said several times that the program would be far more effect is the IRS had said that the penalties on opt out would be 1/2 the regular audit results. Without an incentive to suffer a guaranteed audit on opt out, clients who are good opt out clients should never get into the program because they will not be treated worse than they would if they got in and opted out.

    6. I disagree with your final paragraph "a low-risk assessment is unlikely or impossible." If that were true there would be no opt outs. There are opt outs -- perhaps not a flood -- but many opt outs. And, I think practitioners without the skill set to make the risk assessments do two things -- (i) put clients into the program who perhaps should not be there and (ii) deter them from opting out when they should.

    John A. Townsend

  5. Thanks a lot for your respective perspectives.

    One point that I would like to add, is that we practically see nowhere a discussion related to the penalty mitigation guideline listed in the IRM.
    We can trust them, right? If more people were aware of it, there would likely be a little less fear and more rationale decisions based on the penalties that we could infer from these guidelines.

    For example, the 10K non-willful fine are for accounts greater than 250K. We're starting to talk high balances. The non willfull fines are $500 for accounts up to 50K (not to exceed 5K for all violations) and $5000 for account between 50K and 250K.

    Similarly, willfull fines, as per the IRM depend on the size of the account.
    For accounts less than 50K, the fine is $1000, between 50K and 250K, $5000.
    It's only after 250K that we start seeing the 50% penalty on the balance of the accounts.

    See URL.

    Asher, are you considering those when you make your statements and advise your customers?

    My point is, that based on the facts, if you have a good feeling that the customer is not at criminal risk, then, depending on the size of the accounts, it might still be a good option to opt out, or as Jack suggest, not enter in the first place, even if you consider the willfull penalty.

    I hope we can trust the IRS with these numbers. I wished those were the numbers they would write in the letter they sent to taxpayers who wish to opt out, instead of threatening the maximum fines. That would be fair, instead of playing the scare card.

  6. I am a different Anonymous than the one who posted a day ago.

    Just to comment on Jack's Point 5, I think that for many the IRS has actually created a disincentive to joining OVDP in that for those who join there is the certainty of substantial legal and accounting fees (or the equivalent LCUs for someone amending eight years of returns) as well as applicable taxes/penalties/interest for all eight years, whereas for those choosing quiet disclosure the number of years involved will often be smaller, and there is a strong likelihood of never being audited, or, if audited, that one or more years may have dropped off due to the statute of limitations. The TAS' latest report refers to 30,000 noisy OVDI/OVDP disclosures, as well as 700,000 FBAR filings which isa substantial jump from the 300,000 FBARs just a couple of years ago. The FBAR figures not only suggest that many are choosing QD or forward compliance, but also that many (either willfully or because they are still not yet aware of the requirements) are doing nothing. In effect, those who are doing the most to address past noncompliance are being hit the hardest.

    The IRS comments by various spokespeople seem to carry the underlying assumption that most (possibly a vast majority) of those with unreported foreign accounts were, and still are, willful. IMHO if the IRS is really serious about bringing about increased compliance, the reporting requirements should not be buried at the bottom of Schedule B but be in large type at the top of the 1040 (where the choice to contribute $1 to the Presidential election campaign is now located.) Not to lessen the importance of individual $1 contributions, but I think the whole FBAR issue is more important.

    I am currently in OVDI/OVDP (sorry not sure which is which) and am not disputing the fact that an attorney with experience in the area is better suited to address the nuances of whether one should opt out, but I wonder whether many attorneys are too risk averse. The three successful opt outs mentioned in this blog (Just Me, Moby, and ij) were all pro se and I wonder whether they would not have opted out if represented by an attorney.

  7. Very nice post!

  8. Good job with the post!! It is informative and so much can be learnt from it!!

  9. You did a good job with the post. Thank you so much for sharing the same.


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