1. The context. As I have noted before, the OVDI/P benefits principally persons who (1) have material criminal exposure and (2) have material civil penalty exposure based on civil fraud or the FBAR equivalent of willfulness. Those exposures substantially overlap -- i.e., material criminal exposure would certainly indicate material civil penalty exposure. Persons without those exposures can generally obtain better results outside the inside the program penalty structure (principally the 20%/25%/27.5% miscellaneous or in lieu of penalty). Those persons can obtain those better results upon opt out or simply by not getting into the program to start with. There is a lot of nuance behind this context, but readers of this blog should be able to pick up much of that nuance from earlier blogs.
2. Mr. McDougal, a principal IRS player in the process, was a participant and made some comments.
3. Mr. McDougal raised the point that all of us knew anyway -- in an opt out audit, the IRS can audit the entire return and not just the offshore account related matters. (Note this is the opt out analog to the Form 906 provision that permits audits for other matters even if the inside penalty structure is accepted.) I address that potential with my clients early on in the process of preparing the amended returns to submit in the program. I tell the client to identify all issues whether related to the offshore accounts or any other aspect of the return. I then ask the accountants to be looking for issues other than those related to the offshore accounts. I emphasize to the clients that the amended returns have to be true, correct and complete and not just correcting the offshore account matters. With that scrubbing, at least in our cases assuming the truthfulness of the clients, we do not fear an opt out audit except for the time and resulting expense involved.
4. Mr. McDougal said:
Fraud penalties may be appropriate in some opt-out cases because a correct amended return cannot fix previously filed fraudulent returns, McDougal warned. Also, the requirement of taxpayer cooperation to get clearance from the IRS Criminal Investigation division to participate in the OVDP probably means that taxpayers must file six or eight years of returns and can't simply opt out after getting pre-clearance and submitting an initial disclosure letter, he said. "There is an affirmative obligation to cooperate" in helping the IRS determine the correct amount of civil tax as part of using the OVDP, he said. There is room for the IRS to argue that failure to file the return, foreign bank account report waivers, and dissolved entity statements disqualifies a taxpayer from avoiding criminal exposure, he said.I think we all knew that. Hence, taxpayers with material civil fraud penalty exposure should not opt out. And, carrying that consideration to an earlier decision point, those with material civil fraud exposure should join the program ab initio because they will not like audit results (either audit results upon opt out or audit results pursuant to losing the audit lottery). Further, it should be obvious, failing to cooperate in the opt out audit will expose the taxpayer to criminal prosecution if the client has material criminal exposure. But, on the other hand, those taxpayers with material criminal exposure should not opt out because, even if they cooperate, they will be at high risk of the major civil fraud consequences -- civil fraud penalty, open civil years, and the willful FBAR penalties.
5. Mr. McDougal is a major IRS spokesman, but I should caution that one needs to be careful about what Mr. McDougal and probably other IRS participants say at these public forums. I address a specific instance of concern in a prior blog, Report on Webinar on Opting Out and Litigating FBAR Penalties (1/17/13), here, which I just updated.
6. The report indicates that the Taxpayer Advocate is making the right noises:
National Taxpayer Advocate Nina Olson, who spoke from the audience, said her office deals with taxpayers weekly about potential criminal exposure resulting from unreported offshore accounts. The expatriate community especially is suffering from the IRS's approach to FBARs, she said, offering a stinging indictment of the OVDP program. "It is a profoundly wrong way to run a program," she said, because it is "based on rumor and innuendo, and it's just getting worse; it's not getting better as all of these forms of guidance proliferate." The absence of formal guidance for international taxpayers to rely on is frustrating and unfair, she said.7. Thomas Sawyer, DOJ's senior litigation counsel (international tax), discussed the resolution of the cases once the agency determines the penalty. He said that, "once the claim has been determined, compromise of a claim greater than $100,000 can be authorized only by the DOJ." Further, it is not clear how a taxpayer, having paid the penalty, might sue for its return:
whether they are Tucker Act claims properly brought in the Court of Federal Claims or a suit available in federal district courts. Whether full prepayment of the penalty can be initiated before a refund suit is uncertain, he added.