Monday, July 28, 2014

Time for an IRS Ass Kicking? Herein of Lack of Honor and a Dumb Decision in OVDI/P and Streamlined (7/28/14)

I have said  before that the IRS has, in broad concept, a general program (within the program some variations) to get taxpayers back into the system with some cost.  The problem has always been is whether the cost is appropriate.

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?

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?   
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,
“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.
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...
Vinny: Yeah?
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.
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.


  1. Jack, have you heard this about your own cases yet?

  2. Bravo Jack! You tell 'em! EVERYTHING you say above is the ' Inconvenient Truth'

    Seriously, I think it takes some guts (and I'm sure facts) to be able to say what you are saying. Thank goodness for the First Amendment.

    1. I am really bothered, by the IRS's stance in trying to force that one client into litigation ( and if I remember correctly its because he has a ' large account')
    Give me a break, the size of the account is not an automatic ' Willful'. It just means they are fortunate to have more $$. It does'nt mean they understand the tax code better.
    We all have lives to live and most of us simply cannot deal with ALL the complexities of the Tax code- including me- its not what I spend my time on

    2. Re: the other clients: What is to differentiate a person who has only submitted an OVDP Intake letter (but not the entire OVDP package ) from the person who has spent 2 years in OVDP. Well, other than lots of $ in expenses and a shortened life expectancy from the stress... really nothing.

    If the IRS were to let anyone that has submitted an intake letter withdraw and go straight SDP, why, next we'd have the ones IN OVDP (but no 906s signed) withdraw and want to go into SDP.

    Why transition when you can streamline?

    Somehow, in the IRS's psyche the OVDP is a bear trap- you step in and " gotcha"

    My Q- What's stopping me sending in a Streamlined application and if the IRS wants, they can audit me
    What if another 2000 people did this? The answer is the FEAR that the IRS would pursue you like your taxpayer #1

    Long term, its un - American and it wont work

    I know my kids (born in the USA here) will kick ass the way you do. No doubt in my mind on this.

    My heartfelt support and please forgive the rant

  3. I think Jack you owe me an apology !!
    ..."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,...."

    Well this really sounds like what I have been trying to tell you now for 3 years that the IRS was always trying to maximize revenue and not compliance !!

  4. " my absolute -- on any scale -- best opt out case, the IRS asserted multiple year FBAR willful penalties....."

    Mr. Zwerner... from 4 to 3 to 2 - multiple year FBAR willful penalties......... how many Zwerner cases are out there !

    With litigation the worst case scenario should be 2 years of either 50% or 2X $100K

  5. Time for a class action suit by all the 2009, 2011 and 2012 OVDP candidates that got a raw deal compared to the new streamlined. That is 45,000 people that paid in over 6 billion, much of which was the miscellaneous penalty at 20, 25 or 27.5 %. . That should attract some law firm willing to get their hands dirty.. If the class action suit could claw back 4 billion from the IRS, that would be a nice fee, after giving the participants back most of their money and back taxes. Any takers.?

  6. Well now that is one hilarious post. Thanks for the laugh today.

    But I have a serious question about asset valuation for purposes of the OVDP penalty chart. If you have an asset that fluctuated in value throughout the year (let's say, for example, gold coins). Is the taxpayer required to value the asset on the date during the year that its value peaked or can they use 12/31?

  7. I am currently in negotiations with such a law firm. Patience !

  8. In the official OVDP, it is highest value at any time during the year. I know this first hand because I had an asset that was worth 10,000 on Dec 31st, but 115,000 on April 10th and the IRS made me use the April 10th valuation. That is why they ask for monthly statements, so they can double check that you have picked the highest asset value for the calendar year.

  9. To Globalcapitalism:
    Please keep me informed via this blog on your progress with getting a law firm to take on a class action suit. I have spent over $ 200,000 in legal and accounting fees battling two years of incompetence by the IRS's processing of my OVDP. One question after another to my lawyers just grinding me into the ground with legal fees, because they don't even understand their own FAQ's, tax laws and how to process an amended return . I have only lived in the US for 4 years, do not have citizenship and don't want it. I have never worked a day in the USA and I can leave at a moments notice . I have contributed more to the US treasury than 99% of voting US citizens and yet I am being treated like a criminal. For the 4 years that I have lived here and paid tax on all the money I bought to the USA they want everything I worked for for 50 years in another country because I did not file a FBAR form on June 30th for 4 years. This is robbery and intimidation..

  10. MM , OVDP is calculated on the HIGHEST value in the Year
    Transition on the year end balance
    If you have gold coins, I think you may be doing yourself a favor by not including them and the headache. What's next, your wedding ring ? Its hard enough to have to account for every possible manifestation of a ' financial asset' let alone gold coins. Some CPA actually tried to scare me with the example of declaring gold coins and I found another CPA

    In the case of stocks, for some countries it is just not possible to know which day had the highest value
    In that case I've used the year end value and its been accepted by the IRS

    Blackseal, I empathize with you- I don't think the IRS has a good case based on the limited info you have provided. I also made the mistake of requesting statements etc. from the Bank and providing them and the IRS tried to use them against me
    I think you are a good Opt out candidate

    I also understand your treated like a criminal comment- it makes me ashamed as an American
    I've spent $70K in fees- ( for nothing ) Id like to know about the law firm as well

    Can a class actions suit work if the OVDP participants filed 906s . I guess we wont know till its tried...

    Jack, that WAS a funny post, I did'nt realize you do have a keen sense of humor

  11. very sorry to hear that and I would have probably paid the same if I were not such a "cheap retired SOB" but I did the drudgery and process 100% by myself because my risk tolerance was very high and I do not get intimidated that quickly. Over the last 3-4 years I have helped and guided > 50 Minnows to make informed decisions what is and was best in their particular situation and through this experience I saw the need to find a way to stop the bleeding towards incompetent and ruthless tax lawyers.There are very few law firms specializing in legal malpractice and prosecuting cases against accountants and lawyers and until recently, I have never heard of any involving accounting malpractice. Sure, some law firms will accept the occasional case against a CPA but it is usually ancillary to their main practice.

    I am actually surprised that even in 7/2014 you experience what you described above in your comment. I can tell you 2010 to mid 2013 were horrific years for the average Minnow . Imo the guild of TAXLAWYER should win since 2009 - 5 consecutive Oscars
    for "corrupt" behaviour and liberal billing practices with regards to
    their offshore learning curve.

    With regards to OVDI/P representation this
    guild/professional organization is guilty , in many, many cases of
    dishonest questionable practices, morally depraved, lacking integrity,
    debased in character , acting on mercenary financial motives without
    regard to honor,right or justice. Since 2009 this profession in the US
    had a windfall profit/jackpot of > $500mio. Amongst others -
    putting grandmothers on the government’s conveyor belt to oblivion.

    Credibility must be earned. Most US tax lawyers have not earned credibility in this context .

    After all the conversations/ e-mail
    exchanges I have had with tax lawyers over the last 5 years the things that describes the trade reoccurred so many times :

    1. does not really listen to you and your specific facts and circumstances – is basically on auto pilot

    2. sometimes had the feeling you were speaking to a “stranger” because
    you received generic responses that have not much to do with your case

    3. reading things into your statements that you have never said

    4. makes remarks that constantly defends the IRS and the “system” as honorable and just

    5. factual errors – small and bigger ones

    6. disorganized with regards to billing statements and client correspondence

    I will keep you updated how my negotiations proceed .

  12. ....." I've spent $70K in fees- ( for nothing ) "....
    very sorry to hear that as well, what a waste !

  13. honestabe: starting removal is a process, and if they remove you it takes a few months, but once removed you can not participate in the streamlined program, or transition into the streamlined, and your case will be treated under normal audit examination. You may also not be protected from criminal charges. To be removed you basically have to be very non-cooperative, fail to respond to requests for information or documents, or refuse to sign the 906, after it is finalized. You can also get kicked out if they determine you have provided false information. If your agent has started removal and you have not done any of the above, they are using intimidation .. I suggest you file a letter of complaint to the agent and request that they forward this letter to their manager

  14. Researcher, it is based on empirical data. Many of my clients do not know about the global income and asset rules of the IRS. You are free to reject as you see fit. However, I only state this from personal experience, and offer it, thus, not as a truth, but, as a possible, probable supposition, for many lay readers of this blog.

  15. Wow Jack.... Just back from backpacking, and catching up on my reading. Well said!

    As I have been saying from early days, they are more interested in the penalty revenue (which they are NOT ENTITLED TO) than the compliance objective. Just plain DUMB and disgusting!

    To borrow a question from poor ole Bush after 9/11..... "Why do they hate us?"

    and their answer would be just as wrong as Bushes simplified answer to himself, they would say....."Because you are ALL TAX CHEATS! That is the mentality we are dealing with, I fear.

    Individually, here and there, there is reason as demonstrated by Jennifer Best, but even when it comes from the top, how the it gets translated or 'not heard' in the "belly of the beast" is an entirely different matter.

  16. I must admit that in addition to the rational side of my decision to give up US citizenship (i don't plan to go back to the US), seeing how much resources the IRS WASTED on my OVDI case (trying to extort riduculously huge sums from me, when the facts were obvious and the original FAQs, the law and the Constitution were on my side) made the decision emotionally easier. During my OVDI drama, I gained the distinct impression that the US is being run by a bunch of idiots. Eventually sanity prevailed in my case, but not before I opted out, mentioning that I hoped that a fair and reasonable resolution could be reached "without resorting to appeals or court".

    While I was glad that the IRS saw the light and stopped persecuting me at that point, I still would like to see the IRS get "whupped" in court by one of us minnows.

    And I'd like to see the true sums. How much money have they managed to extort from minnows minus how much they spent on dealing with the minnows. I doubt it will be positive in the end, even though the extorted sums are outrageously unfair.


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