I won't go through the IRS's implementations of the program since it started in 2009. Readers of this blog know that. Of course, what the IRS did not tell from the beginning so that the ordinary lay reader or, let's say, the ordinary taxpayer (who is the customer the IRS claims it serves) could understand that the OVDI/P inside penalty was really meant for the bad actors -- those who intended to violate known legal duties (FBAR and income tax). What does intend to violate a known legal duty mean? Actually, the IRS customer would not really know that, at least to the extent required to take the legal risk that the IRS was claiming they might suffer -- criminal prosecution, multiple year FBAR willful penalties, etc. So, the design of the program forced these intimidated customers to seek legal counsel at great expense, when even most legal counsel could only make somewhat better analyses of the situation, but not perfect because of the uncertainties in application of the concept of willfulness in conjunction with the IRS threats of dire consequences. Who knows what willfulness is except in the eyes of the beholder, and the IRS was threatening, threatening, threatening?
So, a lot of innocent (well, clearly on the innocence side of the continuum) joined OVDI/P, but because of the IRS continual saber rattling (aka threats), many of those innocents were afraid to opt out, and many lawyers were afraid or unable to counsel them as to their real risks on opt out. (I have to admit that I have not been reticent to recommend opt out in appropriate cases, but the dicey nature of this exercise is the fact that, in my absolute -- on any scale -- best opt out case, the IRS asserted multiple year FBAR willful penalties; the IRS won't prevail, but the IRS is hell-bent to force angst and processing costs to force my client into litigation that, in my best judgment, the IRS can't win.) The point though is that the IRS forced through threats an exercise that innocent taxpayers should not have to endure.
Now, as best I understand the recent iteration of the Streamlined program, the IRS realized that it had forced through fear taxpayers into the OVDI/P when they could opt out and get better results. Why force them to join in the first place when a shortcut implementation such as Streamlined can get somewhat close to the right result? Well, now the IRS seemed to be finally talking to their customers in a language they could understand. So, one could ask, why wouldn't it be an easy decision for the IRS to let taxpayers in OVDI/P who had not yet signed a Form 906 to proceed fully under Streamlined. Well, it appears, that the IRS wanted to keep all of the income tax, penalties and interest for closed income tax years and penalties for open years that it was not entitled to, while giving a partial benefit of the Streamlined program (the 5% penalty applied to innocents, many of whom should owe no penalty). Basically, the IRS wanted something that it was not entitled to.
Oh, sure, the IRS says that, well, the taxpayer / customer unhappy with its lesser Streamlined benefit via transition, can opt out and get a better result if he or she is entitled to a better result. That sounds well and good but seems to me to be bullshit, of the same genre smoke that was hawked by tax shelter promoters promoting bullshit tax shelters, but in reverse. Basically, the message the IRS is sending -- intentionally or unintentionally, but by now knowingly -- is that those people who got into the program early to get right with the IRS will be treated more harshly and subjected to greater processing costs, time, angst, etc., than those who sat back and waited on straight Streamlined or proceeded otherwise (quiet disclosure, etc.).
So, with that lead in, it appeared that, in one aspect of the interface between Streamlined and OVDI/P, the IRS offered a narrow window of some fairness to those who joined the program with the intent of opting out -- the precise category of taxpayer the IRS designed straight Streamlined to apply to. As I have reported before, at my questioning, a senior IRS official (Jennifer Best, senior adviser to the IRS deputy commissioner (International)) representing the IRS at a webinar said that, provided the such a taxpayer otherwise qualifying for straight streamlined who had not submitted the final package withdrew from OVDI/P before July 4, 2014, the taxpayer could qualify to proceed under straight Streamlined, which, of course, subjects that taxpayer to risk of a false certification only, but otherwise achieves the limited income tax costs and limited offshore benefits costs offered by Streamlined. A link to the audio recording of that question and answer is here. A partial transcript of the recording is:
Question: “If you have a taxpayer who submitted his offshore voluntary disclosure letter but not yet the final package and as I read FAQ 2 you have to be in OVDP as of July 1st . Can that taxpayer, who clearly qualifies for streamlined, simply withdraw by July 1st from the OVDP and proceed only under the streamlined?Subsequently the panel was discussing the fact that taxpayers who had were in the midst of the preclearance process (and so had not yet filed OVDP letters) did not have to take any action and Ms. Best comparing these people to those who had filed OVDP letters stated,
Answer from Jennifer Best: “Sure so if I understand you correctly, … the taxpayer has already submitted the intake letter or not?”
Questioner’s Response: “Yes the taxpayer had. And we did that during a period of uncertainty but after that we decided hey this taxpayer ought not to be in OVDP he ought to be streamlined and so we were just going to make the streamlined submission
We are ready to submit the final package but it’s only the streamlined. And all of the sudden these rules come out but as I read FAQ 2 you have to be in OVDP as of July 1. So if we just wrote the IRS and said hey we don’t want to be in anymore, we done with you guys, and just submit under the streamlined would that work?
Answer from Jennifer Best: Yes we have contemplated that. So for those that are kind of right in the beginning stages … yes we have contemplated that you that the taxpayer can decide to sort of abandon OVDP and move over to streamlined. So that means you know these transition rules don’t apply right? (questioner says “Right”) Because the plan would be to leave OVDP right?
“Yes that right I think that’s a different stage of the process, though I think if you’ve submitted the intake letter I think that it would help us out greatly if you corresponded with us to let us know what the taxpayer is planning to do.”On the basis of the inference from the Transition FAQs and the IRS senior official's statement in response to a direct, very specific question, I and a number of others withdrew clients from the OVDI/P. (I withdrew two clients / IRS customers.)
Now, I am hearing from attorneys who did the same that, despite the inference in the Transition FAQs and what the IRS's own senior official said and taxpayers' and practitioners' reliance on the statement, the IRS is saying that those who withdrew are not eligible for EITHER Streamlined or OVDI/P because they withdrew (based on statement of the IRS's own senior official).
This decision is beyond dumb and, even, in my opinion, unconscionable. I think the IRS has made some stupid decisions in this program, but this one is beyond stupid and hurts the IRS. First, it would cost the IRS nothing to honor the FAQ implication and statement of its own IRS official in the webinar. Persons who are entitled to Streamlined get Streamlined. What's so bad about that? That does not strike me as an outcome that hurts the IRS (unless the IRS wants to get more than it is entitled to through fear and intimidation and the certainty of increased professional fees). Second, well counseled taxpayers who were well counseled in the decision to seek Streamlined (i.e., they were nonwillful and could properly so certify and withstand an audit of same) don't fear an audit that is the threat the IRS is making by denying them Streamlined and OVDI/P treatment. Simply stated, come on IRS, waste your and the taxpayers' money by auditing me ad nauseum and you will end up with nada, zip, nothing -- except the tax and interest for open years (these taxpayers should go ahead and file amended returns and delinquent FBARs). You could have gotten that and more, the 5% offshore penalty for domestic taxpayers, by admitting them into Streamlined. And the taxpayers / customers would have paid that more to be done with the process.
Dumb. And, of course, unfair.
Now, compare the IRS's behavior here to the local yahoo who negotiated with Vincent LaGuardia Gambini in the offer and counter-offer situation (analogize the taxpayer's attempt to join Streamlined as an offer and the IRS refusal as a counter-offer): The YouTube video of this negotiation is here; a partial transcript (not literal in some parts, but he point is made) is here.
Well, you see where that ended up. Vinny got his money despite the opponent making a very bad decision by not honoring his agreement. I think that the IRS will end up with an ass-kicking from taxpayers -- at least those like mine -- should it persist in this nonsense. What a waste of everyone's scarce resources. I am sure Vinny would have preferred not to fight either, but right is right.Vinny: Hey, Vincent LaGuardia Gambini--
Lisa: His name's J.T.
Vinny: J.T., I believe you and Lisa played a game of pool for two hundred dollars, which she won; I'm here to collect.
J.T.: How 'bout if I just kick your ass?
Vinny: Oh, a counteroffer. That's what we lawyers, I'm a lawyer, call that a counteroffer. Let me see, this is a tough decision you're giving me here. Get my ass kicked or collect two hundred dollars. Hmm, let me think. I could use a good ass kicking, I'll be very honest with you. Nah, I think I'll just go with the two hundred.
[The people in the room laugh]J.T.: Over my dead body.
Vinny: You like to renegotiate as you go along, huh? Okay then, here's my counteroffer: do I have to kill you? What if I were just to kick the ever-loving shit out of you?
J.T.: In your dreams.
Vinny: Oh, no, no, in reality. If I was to kick the shit outta ya, do I get the money?
JT: (contemplates this) If you kick the shit outta me...
J.T.: ...then you get the money.
[Some people weakly laugh. Vinny looks at a guy who's in a neck brace.]Vinny: What happened? Rear-ended?
Guy: No, I fell.
Vinny: Oh. Okay, lets see if we agree on the terms. The choice now is: I get my ass kicked, or, option B: I kick your ass, and collect the $200. I'm goin with option B, (takes his coat off) kicking your ass and collectin' two-hundred dollars.
J.T.: Are we gonna fight now?
Vinny: Yeah, first let me see the money.
J.T.: I have the money.
Vinny: All right, show it to me.
J.T.: I can get it.
Vinny: You can get it? All right, go get it. Then we'll fight.